Australia’s market for new initial public offerings, already moribund, has been further dented by an Australian Taxation Office (ATO) attempt to levy a tax on foreign private equity exits.

 The transaction that triggered the ATO’s stance, and has rattled potential issuers, was the IPO of Myer in November 2009, which raised A$2.4 billion in a deal led by Credit Suisse, Goldman Sachs JBWere and Macquarie Bank. One of the groups that sold its stake in the IPO was the foreign private equity group TPG, which alongside minority partner Blum Capital owned Myer through a Cayman Islands-based entity called TPG Newbridge Myer. The partners gained A$1.58 billion from the IPO.

Shortly after the IPO, the ATO said it was pursuing TPG for a A$452 million tax bill related to the cash from the float – it went so far as to freeze a National Australia Bank account TPG held in Australia in expectation that the money was going to flee offshore (which, indeed, it reportedly already had).

 At issue is where tax on income should be paid. The ATO believes the gains TPG made from the Myer listing constituted Australian-generated income, and that income tax should therefore be paid in Australia by TPG Newbridge Myer (and another offshore TPG company, NB Queen). It is understood to be pursuing TPG for a further A$226 million in penalties for tax avoidance.

At the time of writing, the ATO had not published its final conclusions on the TPG tax situation, and was expecting to do so in late May along with final rulings on tax proceeds of private equity sales generally. The resolution of the case one way or another will have a big impact on foreign private equity appetite for Australia, and in turn for IPO volumes.

“I speak to a lot of private equity majors who are looking at Australia but I can tell you for a fact this is bothering them,” says one M&A banker at an Australian institution. “At the moment, it’s not just the question of the tax, it’s the uncertainty they really don’t like.”

Quite apart from the tax issues, the performance of recent IPOs has been miserable. After announcing an uninspiring third quarter sales result in May, the Myer share price was down more than 25% from its IPO. Another IPO late last year, for outdoor supplies retailer Kathmandu, has also fared badly. The only major IPO in Australia this year has been a A$516 million float from Miclyn Express, the marine services group; at the time of writing that was down 10% from its listing price.

Consequently private equity firms in Australia seeking an exit are believed to be looking for trade sales instead of IPOs. For example Study Group, a university programme provider owned by CHAMP and expected to raise A$600 million, and pallet maker Loscam, owned by Affinity Equity Partners and expected to raise up to A$700 million, have been reported to be heading for trade sales rather than floats. Since the real boom in private equity activity in Australia began in 2006, and firms normally hope to hold their companies for three to five years, there ought to be a host of forthcoming exits. But in this stock market environment, a number of expected floats may never happen.

Nevertheless there is a reasonably robust pipeline of equity capital markets deals expected in Australia when conditions suit, among them listings for Ascendia Retail, which operates the Rebel Sports chain of sporting equipment shops, and is believed to have appointed Bank of America Merrill Lynch, Goldman Sachs JB Were and UBS; the coal and freight business of Queensland Rail, which has been valued at A$7 billion; and Bilfinger Berger’s Australian operations.

The Myer situation fits within the context of a broader conflict in Australian commerce today: a desire to increase tax revenues (also evident in the proposed super-tax to be levied on exceptional earnings by miners in Australia) while also appearing to be business friendly and attractive for foreign investment. “The tax office and the markets don’t always appear to be coming from the same direction,” says an ECM banker in Sydney.

Nevertheless, there are already signs that foreign private equity interest in Australia will persist even if there is uncertainty about where they will be taxed on the proceeds. TPG itself, alongside Carlyle, launched a A$1.7 billion bid for Healthscope in May.

The Middle East has emerged as the fourth world centre for private equity after North America, Europe and Asia.

The numbers are indisputable. A study by the Gulf Venture Capital Association, KPMG and research group Zawya put the total funds raised in the region in the three years to the end of 2007 at US$13.4 billion, from 76 separate funds. Everything is climbing: the $6 billion raised in 2007 is more than double the $2.4 billion of 2005; the number of funds closed in 2007 – 22 – is up by a similar degree, from 12 in 2005; and the average fund size is climbing too, from US$204 million in 2005 to US$274 million in 2007. Last year saw the first billion dollar private equity deal in the region (Abraaj Capital’s $1.41 billion purchase of Egyptian Fertilizers) and the raising of the first billion dollar fund (Abraaj again, with its Infrastructure and Growth Capital Fund).

But it’s not just the figures. Everywhere you look you see new entrants coming in. Abraaj’s name keeps cropping up because it was a first mover (see box): when it set up in its current form in 2001, it had the market to itself. But these days there is competition from local funds, from the direct investment of local banks, from increasing international attention, and from the growing wealth (and newfound willingness to invest locally) of the vast sovereign wealth funds in the region.

What’s the attraction? One obvious reason is the oil price. There is great and growing wealth here at both an institutional and an individual level, and it needs to go somewhere. For any business seeking to get started or grow, liquidity is abundant – and that can’t be said for many world markets today. In particular, the region needs infrastructure. “After more than a decade of underinvestment, the Middle East is going through a huge construction phase, with more than a trillion dollars worth of projects underway,” says Imad Ghandour, principal in the investment team at Gulf Capital, a private equity specialist in Abu Dhabi. “All sectors related to real estate and infrastructure are booming. Soon after, a consumption cycle will begin, supported by an efficient economy liberated from the public sector and significantly higher disposable incomes.”

On top of that, there are interesting demographic changes taking place. According to Faisal Belhoul, the managing partner of Dubai-based Ithmar Capital, over 90% of all commercial activity and non-oil-related GDP in the Gulf is controlled by family firms. He says there are 5000 of these family firms with combined assets of more than US$500 billion, employing 70% of the region’s workforce.

Traditionally, this has been an impediment to investment: people don’t want to sell. But there is also a sense that things are beginning to change. “Often you’ll find that one or two generations of a family build up a business, but when it comes to the next generation, they don’t necessarily want to take it on,” says one private banker in Dubai. That creates an opportunity: either businesses consider listing for the first time in order to give family members an exit if they want it; or it gives private equity players a way in.

“It’s changing for a lot of reasons, not just the generational lead,” says Chuck Pieper, vice chairman of Credit Suisse Alternative Investments, speaking to Asiamoney between company visits in Abu Dhabi. “As many of the families have acquired a portfolio of interests over time, they’re finding that the cash requirement for growing a broad base is larger than the ability they have to generate it. We were reviewing a deal today with three different arms of a family company, and within each of them, two or three different businesses: a mini-conglomerate. They would like to monetise some of them to get the cash required to build others.”

Ghandour adds: “Family businesses eyeing an IPO understand that private equity is a good intermediary step towards public listing, as it proves to the wider investor audience that the company is ready for outsiders and at the same time it infuses new expertise into the company.”

One could also argue that the thinness of Gulf stock markets supports private equity. Many markets in the region – in the UAE and Qatar, for example – are barely a decade old. Saudi Arabia, by a distance the most powerful economic force in the region, has only 123 stocks listed on its stock exchange. In a market like that, with very few small caps to speak of, the stage is set for pre-IPO investment, by private equity or venture capital firms.

And, locally, the financial services sector is growing in sophistication by the day. And it’s here, on the ground, that the broadening of the field is taking place. As local banks have announced their latest results, the words “private equity” are cropping up ever more frequently.

For example, take a look at the 2007 results announcements from Bahrain’s banks, all of them announced in the last few months. Investcorp, which focuses on alternative investments, recorded strong growth in both its private equity and Gulf growth capital businesses. Unicorn Investment Bank completed an initial $150 million capital raising for the Unicorn Strategic Acquisition Fund, which it hopes will become a $1 billion fund in due course. (One of its existing funds, Unicorn Global Private Equity Fund I, bought 55% of Gulf Strategic Partners, a Bahraini engineering services firm, in March to go with four previous investments.) Ithmaar Bank achieved a $200 million first close on its Aldar Private Equity Fund in November. Capivest, formerly known as Khaleej Finance & Investment, confirmed a private equity fund worth $110 million focusing on India. Gulf Finance House told its February AGM that its focus for expansion is on asset management and private equity. And other banks are active as acquirers in their own right, whether as principal finance or to build their franchises; an example is Ahli United Bank, which bought 35% of Oman’s Alliance Housing Bank in 2007.

Several of these banks are relatively new themselves. Ithmaar (not to be confused with Dubai’s Ithmar Capital) is only in its second full year of operation as an investment bank but has embraced the private equity opportunity as a strategic business, launching funds not only for the Gulf but the world. “We take a global view of private equity opportunities,” says Andrew Pocock, who heads the bank’s private equity team; examples have included an investment program for Australia, stakes in  funds investing in China (Ithmaar owns 20% of CITIC International Asset Management), and funds related to Africa, Latin America and CIS’s energy sector.

Big new funds are springing up all the time. Kuwait’s Global Investment House, Dubai Islamic Bank and Millennium Capital (part of Dubai Islamic) announced in March the Global DIB Millennium Islamic Buyout Fund, a private equity vehicle targeting $500 million of commitments, which will invest in buyouts of Shariah-compliant companies. The fund followed an earlier Global Buyout Fund, which had an initial close in November 2007 after raising $550 million and has already committed more than one third of it. Global itself says it manages around $1.6 billion in private equity; at the fund’s launch, Global’s executive vice president, Omar El-Quqa, said: “We believe strongly that this asset class will dominate the region in the coming years as it is well-suited for the region’s macroeconomic factors, such as sustained economic growth, implementation of reforms that facilitate foreign direct investment, and an increased willingness of governments to privatize state-owned entities in a variety of sectors.”

Internationally, too, groups have taken notice of the possibilities in the Middle East. In November 2006, Carlyle Group announced it had established a team for the Middle East and North Africa (MENA) region, headed by Walid Musallam. It was quite a coup: one of Musallam’s previous roles was chief executive officer of the Abu Dhabi Investment Company, a multi-billion dollar investment group backed by the Emirate itself (he’s also worked at Lehman Brothers and the IFC). Firas Nasir subsequently joined from UBS and is based in Dubai; other key hires include Hassan El-Khatib,  a managing partner of EFG-Hermes Private Equity, part of the leading investment bank in the Middle East. Carlyle has yet to make public any investments by its new MENA Buyout Fund, nor its size.

Carlyle is the foreign private equity name everyone talks about in the Middle East, but others are building up too. 3i is invested in a fund from Dubai’s Ithmar Capital, and in a Bahrain-based infrastructure fund run by Manara Equity Partners. Both Ripplewood and Actis have made purchases in Egypt. Blackstone worked alongside Dubai International Capital on the Merlin Entertainments/Tussauds merger in 2007.

Among the foreign investment banks, the clearest sign of renewed enthusiasm comes with their recent movements of personnel. David Law was until recently head of the financial sponsors group internationally (that is, outside the US) for Morgan Stanley, with close relationships with major private equity firms; in February he was appointed chairman of investing banking for Middle East and North Africa out of Dubai, supposedly with a mandate to target sovereign wealth funds. In April, Lehman Brothers created a new role of global head of sovereign wealth funds in Dubai, to be filled by Makram Azar, previously head of the media, consumer and retail investment banking business in Europe and the Middle East.

Aside from the seniority, there are interesting tie-ups too. Credit Suisse announced in March that it would create a strategic alliance with Gulf Capital. “Even when oil was at $20 or 40 a barrel, we thought the Middle East had a lot of potential for private equity,” recalls Chuck Pieper, vice chairman of Credit Suisse Alternative Investments. “It was still early on, but it was developing a real infrastructure that was not just about carbon exports of oil or gas, but real businesses developing here. We spent a couple of years looking for partners.” Gulf Capital proved a good fit: of the four managing partners, one used to work at DLJ (now part of Credit Suisse) and the other had worked for Pieper during his time at GE. The partners have been reported to be raising a fund of around $750 million.

Pieper thinks the time is right for international institutions to play a bigger role. “Something in the order of $12 billion of private equity has been raised for the Middle East and the vast majority of that is done with local firms,” he says. “Less than 20% has been from international names.”

But there is a big difference between the amount of money ready to be invested and the amount of money that actually is. And there’s an even bigger difference between the amount that is invested and the amount that comes out again in exits.

The KPMG report says $13.4 billion has been raised for private equity in the last three years – but only $12 billion has been invested in the last 10. Also, during all that time, just $900 million has been realised in exits: just 7.7% of total investments. And that’s a dramatic improvement: of the 49 investments sold in the last decade, 36 were in 2006 and 2007, although not all exits are reported publicly.

“With a few conspicuous exceptions, there has to date been a lot more success in raising investment capital than in deploying that investment capital,” says Pocock at Ithmaar, “and one consequence of this is that returns are being constrained by the prices being paid.” There are western-style deals occasionally – the Abraaj purchase of Egyptian Fertiliser is one – but “what you find is a lot of the private equity is actually going into what are, in effect, start-up businesses. You get a relatively high level of green field investment, which can mean quite a long lead time before you start generating cash. In pure green field, at least in capital intensive industries, you’re probably not talking about cash generation for three to four years and dividends for five.” That, in turn, leads to a longer holding period than is traditionally seen in the west. “We’re looking at a project now which probably won’t close until next year, and then the equity is drawn down over the next three. That approach is still going to give investors an attractive return, but they have to have confidence and be willing to allocate capital to Ithmaar’s fund for the duration.”

Pieper notes a key difference between the Middle East and other emerging markets, notably China. “You’d probably say 90% of the exits in China are IPOs,” he says. “I would bet in the Middle East we will see at least half of the exits being strategic acquirers.”

There are other challenges for private equity too. It’s true that the nature of family business is changing, but it’s still very much there, and change takes time. “The economic backdrop that makes for a very active private equity market like in the US and Europe generally speaking does not exist in the Gulf,” says Pocock. “One of the reasons for that is that a lot of the enterprises here are family-owned, and while many have made a lot of progress in corporatizing themselves, some are still run in their old-fashioned form as a sole proprietorship or family partnership. In these cases there’s a reluctance, particularly if the patriarch remains alive, to dispose of any division, no matter how poorly it may be performing.”

And it creates some doubtful arrangements too. In May, The National Investor, an Abu Dhabi-based investment group, calculated that 75% of businesses in the GCC region have at least two board members from the same family. In Kuwait, one family can occupy the whole of a board, and in Saudi Arabia, 75%.

And underpinning any boom market is a perennial challenge: people. Pieper says he spends one third of his time on people matters. “The whole private equity industry is people dependent,” he says.

“Many individuals and institutions seeking to enter this business underestimate the issues involved,” says Pocock. “There is a significant shortage, not of able people, not of talented people, but appropriately experienced people trying to make their way in this business.”

BOX ONE: SOVEREIGNS

As everyone knows, the really big money in the Middle East is with the sovereign wealth funds. Nobody knows the precise figures, but the Abu Dhabi Investment Authority may have as much as $1 trillion under management. Of the estimated $3 trillion in sovereign funds internationally, probably almost half is run out of the Gulf. A recent report by Private Equity Intelligence estimated that 60% of the world’s sovereigns are invested in private equity, with between $120 and $150 billion committed to the sector, so if the Gulf accounts for about half that figure, it’s clear there are some huge funds to be deployed – and the money just keeps coming out of the ground.

Traditionally, though, the sovereigns have focused on investments outside the Gulf, in order to diversify. The investments that get the most coverage are, for example, Saudi Arabia’s Prince Alwaleed or Abu Dhabi’s ADIA buying chunks of Citigroup, or the Kuwait Investment Authority taking holdings in DaimlerChrysler and Merrill Lynch.

But recently, sovereigns have started to show a willingness to invest in the region as well, if not in their own name then through subsidiaries, or for other groups mandated or supported by the state. Take Dubai Holdings, owned by Dubai’s ruler, Sheikh Mohammed bin Rashid Al Maktoum. Its financial services holding company arm, Dubai Group, was launched in 2000 and holds a wide range of direct and indirect investments worldwide. These include American, European and Asian interests, but also stakes in numerous Middle East groups such as EFG-Hermes, Global Investments House, TAIB Bank in Bahrain, Dubai Bank, and Emirates Cement Company. Dubai Investments is a separate entity again, the largest investment holding company listed in the UAE; it has a private equity and venture capital division called M’Sharie, whose investments include a range of local companies from rubber to driving centres, cooling machinery and lab technology. Also in Dubai is Ithmar Capital, another GCC-focused private equity fund. Its first two funds raised $70 million and $250 million respectively, and a third raising later this year is rumoured to be targeting as much as a billion dollars. While not part of a sovereign, its partners in its funds do include sovereign wealth funds, as well as international funds and institutions, among them 3i. An example of a recent investment was Panceltica, a Qatar-based provider of fast track housing, in which Ithmar was a pre-IPO investor.

Ninety minutes up the road in Abu Dhabi, ADIA, the heavyweight of sovereign funds, does not invest locally. But Abu Dhabi Investment Company, a sister company of sorts to ADIA, includes a private equity division focused on the MENA region. It is, for example, developing the Queen Alia Airport project in Amman, Jordan. Then there’s Mubadala Development Company, a wholly owned investment vehicle of the Abu Dhabi government, established in 2002. Mubadala’s mandate is to establish new companies and acquire strategic holdings in existing ones, locally and overseas. While some of its holdings are in the West – most notably, stakes in Ferrari and Carlyle – most are in the Gulf, such as stakes in Abu Dhabi Ship Building, Emirates Aluminium and a host of healthcare businesses. (Mubadala is not the only example of this interesting twist of Gulf funds owning stakes in American private equity firms: ADIA has a stake in Walden Capital.)

Still, many in the industry do not see sovereigns as direct competitors. “In reality, the private equity houses competing for deals are less than a dozen,” says Imad Ghandour at Gulf Capital. “Sovereign wealth funds usually have a different agenda compared to private equity firms, and rarely compete head to head with private equity houses.”

 BOX: ABRAAJ

Abraaj Capital is enjoying the benefits of being a first mover. While other funds and enterprises grapple for opportunities, Abraaj has around US$5.25 billion under management already, across five funds.

“We had the advantage of being the early birds,” says Omar Lodhi, executive director at Abraaj in Dubai. “We entered this space as principals in 1995, and in our formal structure as Abraaj in 2001, when nobody knew what private equity was, leave alone sensing any opportunity. We’ve grown in tandem with the opportunities around us in the region.”

From the outset, Abraaj has not limited itself to the Gulf, but to a region it calls Menasa, for Middle East, North Africa and South Asia. “That’s some 1.8 billion people, $3.2 billion in GDP, and a region that has historically had a lot of cultural and economic ties that are now being rekindled,” he says. Taking this approach benefits from the synergies between resource rich and population light countries in the GCC, and those with the reverse demographics in south Asia and Africa. Much of the region is also now benefiting from an agenda of business reform.

With its scale, Abraaj tends to appear on the landmark private equity deals in the region, such as the acquisition and exit of Aramex International, and the region’s biggest ever private equity-led buyout, the purchase of Egyptian Fertilizers. Other deals, worth at least $100 million apiece, have included investments in Acibadem Healthcare Services in Turkey, Air Arabia in the UAE, and GEMS Schools across the region. Access is helped by a remarkable roster of shareholders and executives, among them Saudi Arabia’s Sheikh Abdulrahman Ali Al Turki, Kuwait’s Public Institution for Social Security, the Qatar Pension Fund, Citicorp, and numerous other regional business or political figures. “They’re all very influential institutions and people who permeate the fabric of society, of business and corporates and government within the region,” says Lodhi. “They are extremely useful throughout the value chain of private equity we practise, in terms of deal sourcing, post-acquisition management, and helping companies grow.”

Apart from being one of the few businesses around to be able to demonstrate a full-cycle track record, Abraaj really now stands out for its size. “The need for larger funds arises because corporates around us now are growing,” he says. “Aramex when we bought them were $70 million, and when we exited, $300 million. Today they’re close to a billion. That’s the kind of growth we are seeing in this region.”

Liquid Real Estate, Euromoney magazine, June 2008

 As the market for big IPOs dries up, Indian real estate is becoming more and more the preserve of the private equity industry.

An example of the momentum is Red Fort Capital, a Mauritius and Delhi-based investment management firm specialising in real estate. A new offshore fund, its second, is expected to close this month [JUNE] with a corpus of Rs35 billion (US$800 million) to invest in the sector in India.

Red Fort India Real Estate Fund II targets everything from individual investors and pension funds to foundations and governments in Europe, the US and elsewhere. Its investment remit is similarly broad, covering residential, commercial, retail and hospitality sectors, provided they are compliant with foreign direct investment rules. In June the manager also expects to close a Rs10 billion domestic fund.

 Red Fund’s first fund allocated $400 million to Indian property, including projects of Bangalore’s Prestige Group and a township being developed by the Indu Group, from Hyderabad. Red Fort says that fund has generated 55% returns to international investors.

While Red Fort is a specialist, India’s bigger banks are raising capital too. In May ICICI Bank began raising $1.5 billion for a private equity fund and announced it was considering raising $1.1 billion, which could rise to $1.5 billion, for a real estate vehicle alongside , to invest in residential and commercial projects in India’s major cities. This fund, like the Red Fort fund, plans to raise most of its funds from overseas, with the US, Europe, Japan, China and the Middle East targeted.

Also in May, Kotak Mahindra Bank announced plans to raise about $1.2 billion for two new funds for India. Although it appears this will chiefly invest in infrastructure rather than other real estate, Kotak already runs an $800 million real estate fund and may raise more.

It’s not just local houses who see the opportunity. At the end of April Blackstone Group’s real estate arm, Blackstone Real Estate Partners, announced it would invest approximately $18 million in a minority stake in Synergy Property Development Services, a project and construction management company based in Bangalore and founded in 2003. The stake, though modest in investment size, comes with board representation.

Synergy manages over 100 million square feet of office, retail, residential, hotel and hospital property, and plans to expand into infrastructure. Blackstone, whose Real Estate Partner VI reached capital commitments of $10.9 billion to become the largest real estate opportunity fund ever raised, has a dedicated Mumbai office for its real estate group.

 Indeed, Blackstone and others realised some time ago that real estate was one of the best ways to put money to work in India. Partly, it’s because property represents an obvious growth area in India: there is not of enough of any quality real estate in India to match its growth, whether it be houses, shopping centres, offices or airports. Also, it’s an easier way to get in than to try to purchase meaningful stakes in India’s growing companies, many of which have no need or inclination to give up much control.

 Citigroup Property Investors, for example, closed a US$1.29 billion Asian real estate vehicle, CPI Capital Partners Asia Pacific, in February 2007, with India as part of its focus. The previous month it launched a partnership with Bangalore real estate developer Nitesh Estates to build a 250-room luxury hotel in Bangalore, and even that followed $250 million of previous investments in India’s residential and hospitality sectors. Earlier still, in 2006, Morgan Stanley Real Estate announced an investment in New Delhi-based real estate management company Alpha G:Corp Development, following it up the next January with a US$152 million investment in Oberoi Constructions, a real estate developer. Even further back, Tishman Speyer announced in 2005 a joint venture with ICICI Venture Funds Management to develop real estate projects in India.

More recently, Morgan Stanley has confirmed plans to start a private equity unit in India, with property expected to be part of its remit; and Deutsche Bank’s RREEF Unit has said it plans to invest over $1 billion in the next three years in Indian real estate and infrastructure. Warburg Pincus has also taken a stake in a local developer, while 3i Group raised $1.2 billion for Indian private equity investment in April, albeit not specifically for real estate.

In the meantime, the performance of Reliance Power – the world’s largest ever private sector IPO, but well below its issue price at the time of writing – has helped to put issuers off seeking new money from the public markets for the time being. The weak post-listing performance of DLF, considered the landmark real estate listing in India in recent times, has not helped, while there is still no sign of legislation emerging to allow for the formation of real estate investment trusts in India.

Euromoney magazine, May 2008

Interview with Cui Jindu, Vice Mayor, Tianjin Municipal People’s Government

Tianjin is perhaps the most exciting area for growth in mainland China, backed by the national government as the country’s next engine of economic development. Where once Shenzhen was the focus of attention for reform and growth, and then Shanghai’s Pudong area, Tianjin is now set to take up the mantle.

China’s State Council first confirmed this important national vision for Tianjin and the Tianjin Binhai New Area in 2006, and the municipality received a further boost in March of this year, when the State Council approved the launch of an ambitious pilot program for financial and commercial reform.

“This document is of great significant for reform and innovation,” explains Cui Jindu, the Vice Mayor of the Tianjin Municipal People’s Government. “Just as the government made the decision to open up Shenzhen n the 1980s, and Pudong in the 1990s, in the early 21^st century it has decided to develop the Binhai New Area. These three new areas have been developed in different stages and different economic backgrounds. But all of them have had – and will have – great influence on the development of the economy of the whole nation.”

The Tianjin story involves the city itself – a city that has boasted 600 years of industrial development, and is a thriving commercial location in its own right – and the Tianjin Binhai New Area. Much more can be read on this exciting venture in the later pages of this guide, but it has been building rapidly since its inception in 1994 and embraces the largest port in Northern China, a new economic development area, ecologically sound cities and hubs for IT, technology and outsourcing, among other things. “The central government attaches great support to the Binhai New Area, not only in terms of finance and tax, but in its organisation and implementation,” says vice-mayor Cui. And it is an outstanding time in China’s development to receive such support. “When Shanghai and Shenzhen opened up, China had just entered economic globalisation,” he says. “But as Binhai New Area is opening up, China has passed the transfer period of entering WTO. It has already entered globalisation.”

Tianjin and the Binhai New Area will be a testing ground for widespread financial reform, also explained in more detail in the later pages of this guide. “The central government has urged Tianjin to speed up reform, especially in finance,” he says. “It will allow innovation with an attitude of: ‘Go and try first’, so we can develop, collect experience, and provide a working model.”

The development of this pilot scheme will serve all of China, and it will also act as a spur to growth and innovation in the Tianjin area itself. Among other things, it will be a focal point for attempts to increase the proportion of direct finance in China, by becoming a centre for private equity, for example. It will attempt to combine all financial services, including banking, insurance and securities, within a single body, to establish whether a comprehensive financial services approach is a better model for China. It will be a testing ground for foreign exchange reform, with some local banks permitted to conduct trading business never previously permitted. It will be home to China’s first international over-the-counter securities market, and to its first national emissions exchange, as well as to a property rights exchange. And it will be home to an economic and financial arbitration centre quite different to anything previously attempted in China.

All of this will be done in the spirit of learning and cooperation. “We welcome  enterprises, banking and other financial institutions, to join our progress,” says Vice-mayor Cui. It will be fascinating to watch this ambitious plan take shape. As he says: “The trend is upwards.”

TIANJIN

Tianjin has centuries of history as a centre of commerce and trade, and is ideally located to serve the growth of the North of China. It was once known as the Wall Street of North China – and it could become so once again.

Tianjin, one of the four municipalities directly under the central government of China, is located 137 kilometres southeast of Beijing. Its trading port was opened in 1860 and by 1930 it was the largest industrial and commercial city, and the key financial centre, in the north of China. Today it hosts a population of 10.43 million permanent residents.

Its location is one of its principal assets: not just its proximity to the national capital, which will soon become a 30-minute train ride when a new high-speed rail link opens before the Olympic Games, but also to Bohai Bay, where its port already links with 300 other locations worldwide, and is ideally located for trade with Korea, among other places. Tianjin is at the heart of the Circum-Bohai area, which covers the land surrounding Bohai Bay from Dalian in the north round to Yantai in the south.

Openness and innovation is part of its psyche. It was one of the first of China’s coastal cities to open up to the outside world in the late 1970s. “We were one of the first gates to open to the world,” says Zhang Xiaoguang, director at the Tianjin Municipal Development and Reform Commission. Since then, it has become recognised as a national leader with its advanced technology, favourable environment, and strong supply of human resources.

Tianjin, unlike most cities, is blessed with natural resources, most notably oil and gas: its Bohai and Dagang oil fields are among the country’s key developments, producing 17.83 million tons of crude oil and 880 million cubic metres of natural gas in 2005. Its coastline naturally gives it sea salt resources – its Changlu Salt Field produced 2.3 million tons of salt in 2005, 10% of the national output – and more than a dozen metal minerals are found there. Plentiful warm underground water is another asset, as is the sheer scale of available land – Tianjin accounts for over 1.1 million hectares, 37.4% of it arable; soil is fertile and the cost of development is generally low.

These natural assets have been reflected in exceptional growth in recent years. Tianjin’s total GDP was RMB501.8 billion in 2007; its total industrial output topped RMB1 trillion. Between 1993 and 2006, Tianjin enjoyed double digit growth in gross production value each year. Tianjin has attracted investment from over 110 countries and regions, with almost 18,000 foreign-funded enterprises having established branches there. Total investment so far is over US$55billion, and a remarkable 128 of the top 500 enterprises in the world have invested in Tianjin.

Human resources has long been a key to Tianjin’s success. It is home to the first institution of higher learning in China’s modern history: Tianjin Beiyang University of Western Studies (now Tianjin University), established in 1895. There are over 40 institutes of higher learning in Tianjin, serving 300,000 registered students; there are also 1000 scientific and technological research institutes, and over 600,000 technicians. The Tianjin Hi-Tech Industrial Park, founded in 1988, was one of the first national new and high tech industrial development zones established with the approval of the State Council of China. Tianjin is considered one of the top three regions of China in terms of educational ability, and was among the first locations to provide nine-year compulsory education.

Tianjin has combined all this with a reputation as a liveable city. It has great historical and cultural significance, and is known in particular for its opera and quyi performances. Its museums and memorials are nationally renowned, and it is recognised as a prestigious area for sports: it will hold football matches during the Beijing Olympics in an outstanding new building, the Tianjin Olympic Central Stadium.

Tianjin is undergoing a major redevelopment of its financial district, quite separate from the developments going on in the Tianjin Binhai New Area. The city’s North Jiefang Road was considered the region’s financial centre as long as a century ago: HSBC opened its first business here in 1882, the Qing dynasty established the first ever state-run financial organisation, the Official Exchange Bank of Zhili, here in 1920, and by 1935 21 foreign banks had been set up by institutions from eight countries, alongside 29 banks invested by Chinese.

Even today, one can see fine buildings characteristic of the area, and it remains home to landmark institutions including the Tianjin municipal government, the most important national government departments, the development and reform commission, and major local and international banks. Accoring to Du Qiang, deputy director general of the Financial Affairs Office within the Tianjin Municipal People’s Government, there are 178 financial institutions in Tianjin, with RMB946 billion of assets between them, including RMB834.2 billion of deposits.

North Jiefang Road will be the focal point of the redevelopment of Tianjin Financial Town, which will cover 113 hectares, including a total built up area of 2.3 million square metres, bordering the Haihe River. An estimated RMB26 billion will be invested in this redevelopment, which will be 10 years in the making.  A strict division of enterprises will help to make the area efficient and focused.

A financial landmark area will host the headquarters of the recently-formed Bohai Bank, and also potentially the office of the OTC market soon to be established in Tianjin (see the article on financial reform for more on Bohai Bank and the OTC market). This will be the area for securities transactions. A financial auxiliary service area will cover a construction area of 700,000 square metres, including the Tianjin Tower skyscraper; this area will accommodate service industries. Another area will cover intermediary services and facilities for auction; there will be designated sections for hotels and offices; and two other areas cater for financial and business enterprises, including the offices of major state-owned banks.

“Jiefang Road has had 60 years of industrial development,” says Zhao Feng, president of the Financial City of Tianjin Development Company, a state-owned company approved by Tianjin Municipal government to be responsible for the overall development of Tianjin’s downtown financial projects. “More than 100 years ago we had more than 50 banks and financial organisations locating their office buildings here. It is a historic place for the finance sector’s development.”

Feng believes Tianjin has many advantages in its development of the new financial town. “We understand the transportation network for a finance city is key,” he says. “Our new train station [set to open before the Olympics] connects with Beijing and South China; the high speed train will take just 30 minutes to Beijing; we have new bridges crossing the river; and although we already have Tianjin airport we are considering setting up a small airport within the finance city.” An underground transport system is another key part of the city’s convenience as a financial location.

Feng says several projects are underway, while land collection and redevelopment is also well advanced. The financial town in Tianjin downturn will work in partnership with the other financial ventures underway, such as the Tianjin Economic Development Area within the Tianjin Binhai New Area.

In short, Tianjin is well placed to reclaim its historical importance as a centre for financial services. Its ambition as a city is impressive, and when combined with the developments in the Binhai New Area, its momentum looks unstoppable.

TIANJIN BINHAI NEW AREA AND TEDA

The Tianjin Binhai New Area is one of the most exciting commercial developments in China. It is a key part of national policy thinking for the future growth of China, and its development has the backing of the central government.

The Binhai New Area covers a 2270 square kilometre area on the coast near Tianjin itself, with a 153 kilometre coastline and a population today of around 1.5 million. It covers three functional areas – the Tianjin Port, a free trade zone, and the TEDA, described below – as well as three complete districts (Tanggu, An’gu and Dagang) and parts of two more. Viewed from above, it can be visualised as a combination of a high-tech axis and a marine belt, embracing three ecologically sound urban areas and eight industrial zones, covering areas including technology, advanced manufacturing, chemicals, seaport logistics, an airport-based industrial zone, coastal leisure and tourism, the port and the finance-based CBD.

TBNA was first envisaged by Tianjin’s municipal government at the end of 1993, and has grown tremendously since its formal launch the following year. “In 17 years, it has achieved amazing things in terms of economic development,” says Chen Fang, chief of financial and investment development bureau on the administrative committee of Tianjin Binhai New Area. “In early 1994, at the beginning of this new area, its GDP was around RMB11.2 billion. In 2007 it was RMB236.4 billion – an average annual growth rate of more than 20%.” Per capita GDP is US$19,200 – very high by Chinese standards – and other indicators demonstrate the area’s progress too. Local government fiscal revenue has gone from RMB2.36 billion to RMB48.1 billion between 1994 and 2007, while the export value of foreign trade has jumped from US$500 million to US$24.5 billion over the same period – a 50-fold increase. “The Binhai New Area’s industrial output is RMB630 billion,” says Fang. “That is higher than in Pudong.”

So the achievements have already been impressive. But the area’s future looks brighter still, and was mapped out in the Outline of the 11^th Five-Year Plan for the Development of National Economy and Society in the People’s Republic of China. This landmark policy document, released in 2006, includes this passage: “Efforts shall be made… to push forward the development and opening of Tianjin Binhai New Area, so as to accelerate the development of the regional economy.” A detailed briefing from the State Council of the People’s Republic of China on the new area says: “Promoting the development and opening up of the Tianjin Binhai New Area is an important strategic arrangement made by the central committee of the CPC and the State Council, based on the overall situation of China’s economic and social development at the new stage of the new century.” It adds: “Promoting the development and opening up of the TBNA will be beneficial for strengthening the international competitiveness of the Beijing-Tianjin-Hebei region as well as the circum-Bohai region… the TBNA is the gateway to China’s vast hinterland and boasts outstanding geographic advantages, profound industrial foundation, and great potential for growth. The TBNA is an important window for China’s participation in economic globalization and regional economic integration.”

This clear policy support, which in March was followed by state council approval for the new area to serve as a location for pilot financial reform (see next article), has made a huge difference to the TBNA: it is no longer just striving to support Tianjin but is part of the national development strategy, and a key part of the development of the whole of northern China.

Even before these welcome national directives, TBNA’s performance had been outstanding. Already, 80 of the world’s top 500 enterprises have invested in the new area, including Motorola, Airbus, Toyota and Samsung. More than US$20 billion of foreign direct investment has been utilised so far. There are 28,000 companies established here, and the area contributes more than 45% of the entire GDP of Tianjin municipality despite having only one sixth of its land mass and one eighth of its population. “For foreign invested companies, this is now regarded as the area with the highest investment returns and the highest margins in the whole of China,” says Fang.

So with the might of the national government behind it, it’s not hard to imagine how dramatic the growth will be from now on. “If you look at Shenzhen, the first big opening up of China to the world, the whole economic capacity of the Pearl River Delta has been amazingly improved,” says Fang. The same is clearly true of the Yangtze river delta ever since Shanghai’s Pudong district was given similar support. “Now, you can see the focus shifts from the south to the Tianjin Binhai New Area.”

The idea is that TBNA serves to spur development of a much bigger region, including Beijing, Hebei Province, and what is known as the Circum Bohai Region, which covers the land area around the Bohai Sea. Its coastal location gives it advantages for both inward attraction and outward export; Tianjin Port, for example, has trade with more than 300 ports in 170 countries and regions worldwide (see the infrastructure article on page xx for more on the port and other transport infrastructure). “By 2015,” says Fang, “The Tianjin Binhai New Area will take its turn to be the third growth engine for China’s economic development.”

A key part of the TBNA is the Tianjin Economic-technological Development Area, known as TEDA. This is a national economic zone and is located at heart of the TBNA, five kilometres from the port, 45 kilometres from Tianjin’s downtown and 120 kilometres from Beijing. Originally approved by the central government in 1984, it is already a well-established manufacturing base, and for 10 years in a row it topped a list compiled by the Ministry of Commerce on the investment environment of national development zones. By the end of 2007 TEDA had approved 4,485 overseas projects from 74 countries and regions, with a total investment of US$40.33 billion; electronics and information are two leading industries here, with the biomedicine industry also logging exceptional annual growth of 30% in recent years.

Like the rest of the new area, TEDA’s role gained importance when the Eleventh Five-Year Plan boosted the areas profile in 2006. It will be here that the pilot financial reform scheme will be implemented and tested, giving the area a historic place in China’s development.

The administrative committee responsible for TEDA’s development and planning have been fastidious in making sure that it is a desirable place to live as well as a centre for commerce. There are designated residential areas for senior staff and management, and for general residential use; a lake, with carefully considered construction around it; there is impressive medical and educational infrastructure, including two hospitals and two international schools; there are areas for shopping malls and hotels, with two five star hotels already built and several more under construction; there will be a theatre and a museum; and there is a light railway that is already operational.

“According to our master plan, we will have very comprehensive infrastructure to support the finance sector’s development, including entertainment, residential, parks, hotels, medical and education,” says Qiao Wei, deputy director of the Investment Promotion Bureau at TEDA.  “We aim to set up a complete, dynamic area, a first class international CBD.” Top consultants such as CBRE have been involved in the development of this area.

Already it is proving popular: almost 90% of the finished office buildings in what is known as Finance Street, and in other areas of TEDA, are occupied already. “More and more investors are interested in our area, so we would like to speed up the whole CBD development and construction,” says Wei. Most of the foreign banks in Tianjin are represented within TEDA, with some banks already considering it a suitable place for a national centre (see next article).

TEDA is also a key location for service outsourcing, having been recognised as one of the country’s 11 key service outsourcing base cities by the Ministry of Commerce in 2006. There is a dedicated park for this business.

The Tianjin Binhai New Area and its TEDA zone exemplify why observers are so excited about the potential for growth in this area. The performance has already been extraordinary for years – and now it will be combined with national support and drive. The future looks bright.

FINANCIAL REFORM

In March, the State Council took a landmark step when it approved Tianjin Binhai New Area as the location for pilot financial reform in China. This cements Tianjin as the third growth engine for China after Shenzhen and Pudong; it also ensures that the area will be closely watched by observers worldwide as some of the most dynamic areas of Chinese finance are tested and perfected. As Zong-Sheng Chen, vice secretary-general of the Tianjin Municipal People’s Government, puts it: “Within this area, we can go and try first.”

There are six key elements to this reform. The first is to attempt to increase the proportion that direct finance occupies in Chinese companies. “The present situation is that indirect finance covers 90%,” explains Cui Jindu, the Vice Mayor of Tianjin. “That doesn’t go well with economic development.”

Improving the role of direct finance will involve some very interesting projects. Tianjin will be a centre for the development of domestic private equity. Although 10 private equity funds have been approved domestically, the only one that is fully operational is in Tianjin: the Bohai Industrial Investment Fund Management Company, which was approved at the end of 2006 and is approved to raise RMB20 billion, having raised a RMB6.1 billion first tranche so far. The fund’s major sponsors include the Bank of China Group, the National Council for Social Security Fund of China, the Postal Savings Bank of China, China Life Insurance, and two state-owned Tianjin companies. The management group is majority owned by Bank of China. 

This fund has already put more than RMB2 billion of funds to work, starting with its first purchase, of a steel tube manufacturer called Tianjin Pipe, in November 2007. “We have made breakthroughs in creating the fund,” says Au Ngai, CEO, a former partner at global private equity giant Newbridge. “At the time of our launch there was not even a partnership law. So the Tianjin government, working closely with the National Development and Reform Commission, has been a major force behind that breakthrough. There is a major effort by the government to position Tianjin as a hub for launching private equity funds.”

Local funds do have something of an edge, in that purchases made in renminbi create no pressure on foreign exchange reserves, and in fact make money for social security funds. “Secondly, our state-owned nature allows us an advantage on winning trust with businesses,” says Ngai.

Why does China, with all its liquidity, need a private equity industry? “Right now most of China’s company financing is done through indirect, secondary financing, which is unhealthy,” Ngai explains. “Our fund is a project within a much larger scheme to help with direct financing. This kind of professionally managed fund investment entity provides a different venue for investors to allocate assets, and for investee companies to receive financing.” Ngai says the fund is “95% similar to any [commercial private equity] fund”: it has a 15 year maturity, and generally looks at exiting investments after a three to five year exit. It has 30 people on staff, including 18 investment professionals.

Investing the full RMB20 billion it is permitted to raise should by straightforward. “From the speed of our investment during last year, I don’t think that should pose any problem,” Ngai says. “We’ve been cautious last year because of valuations; now in a more normalised market we should be able to do more.” A vibrant industry should develop: with 10 approved funds in China, likely to be allowed to raise RMB10 billion each on average, that already means an approved pool of private equity capital of RMB100 billion in domestic funds.

Another effort Tianjin has made to be home to this emerging industry is by hosting the country’s first national private equity conference, which will hold its second annual event in June. Last year 223 funds and institutions joined the forum, and a total of 5000 participants; this year the forum has been expanded to include some funds in Europe and the US, and a total of 500 funds are expected to attend, with at least 6000 overall participants. A national private equity association is being established, and a partnership law has been developed.

Additionally, a dedicated funds centre is being established within the Binhai New Area to attract private equity funds, while tax and registration policies are being designed to be more appealing to the industry. And outside of private equity, other efforts are being made to improve direct equity participation, including promotion of IPOs, and a study into the potential development of a real estate investment trusts market.

The second area of reform is to establish a comprehensive financial services business. In China, there has always been strict separation between commercial banks, securities houses and insurers; the idea now is to find out in Tianjin how a combined entity might work. The first step towards this was taken in October with the formation of Teda International Holding Company, which will encompass business in banking, securities, insurance and funds. (It is also one of the shareholders in the new private equity fund). “It covers every area of financial services,” says Vice Mayor Cui.

A third area involves the development of new specialist areas of the financial system. One example is lease finance, where Tianjin is already the clear leader in the development of this new sector. “Already Tianjin has four financial leasing companies,” says Du Qiang, deputy director general of the Financial Affairs Office within the Tianjin Municipal People’s Government. “It has made Tianjin a centre for lease finance.”

One of the early entrants into this industry has been ICBC Leasing. Fan Ergang, vice chairman of the board, explains what prompted ICBC to pick Tianjin as the centre for its new business – after all, its 10,000-strong target customer base in aircraft and ship leasing covers most of China so it could have chosen anywhere. “The decision was made to locate the company in Tianjin mainly because of the boom and pilot reform happening here in the Binhai New Area,” he says.

In particular, financial reform is appealing to ICBC because of the move towards mixed operations in the finance sector and because of the possibilities for the development of risk management policies. The pilot foreign exchange liberalisation, discussed below, should also be useful for a leasing company so as to avoid currency fluctuations.  “We believe we will have a brighter future, with a more comfortable operating environment and more flexible inspection policies and regulations,” Fan says. “There is also more potential.”

The outlook for lease finance is exceptional in China. Today, the ratio of lease finance is just 3% in China, compared to 30% in the US – which means that after products are manufactured, only 3% of them are sold or financed to their next users through a lease in China. That shows the potential of this area. 60% of aircraft globally are purchased by leasing companies, and then leased to operating companies for the airlines. “Most Chinese airlines just lease the aircraft from overseas finance leasing companies, because there’s been no such leasing company to handle these activities in China until now,” Fan says. He says domestic airlines leased 992 aircraft from overseas companies by the end of 2007, and that 3000 more planes will be needed in China in the next 10 years. “You can see through these numbers how large the potential of the leasing market is in China,” he says. It’s a similar story for ships, trains and even power.

Another appeal for ICBC choosing the Tianjin area is the neighbours. With zones dedicated to manufacturing and high technology, “that means the complete supply chain for certain sectors will occur in the Binhai New Area.” For example, Airbus has built a major manufacturing base in the new area: there is now a complete aviation supply chain present including machinery, engines and even seats manufacturing.  “With these two accumulating effects, one financial and one manufacturing, we believe an ideal economic base and environment will be created.”

There are other specialist institutions being built too. The Sino-German Home Savings Bank, or Bausparkasse, began operations last year. It offers home loans and was jointly set up by Construction Bank of China and Bausparkasse Schwaebische Hall. Another institution, Binhai Rural Commercial Bank, also opened in 2007, aimed at building the financial service system in rural areas around Tianjin.

One of the most significant new institutions is Bohai Bank, which officially opened in February 2006 – the only nationwide join-stock domestic commercial bank approved by the government since 1996, it was launched in part to promote the financial innovation enshrined in the State Council’s ambitions for Tianjin. It has seven major shareholders, including both state-owned enterprises and private companies; among them is Standard Chartered. The diversity of its structure is unusual, and is designed to help with decision making. It is considered a leader in corporate governance, has an excellent independent audit and risk management system, and has its own internal five-year development plan which includes a unique remuneration and welfare system aided by an external remuneration advisory company.

Already, despite its short history, Bohai Bank has launched 25 new products in areas such as wealth management, loans, trade settlement and custody. It has researched financing products using bond, trust and derivative structures, and has launched a highly regarded loan mortgage service, advancing 427 loans worth RMB300 million in its first six months. It founded an investment banking department in April 2007 and is at the heart of foreign exchange reform in the new area, discussed below. It has also already participated in 11 underwriting groups for commercial paper issues. Total assets had reached RMB32.49 billion by the end of 2007, with a deposits balance of RMB25.84 billion and loans or RMB18.12 billion; after-tax profit was RMB45.66 million, well ahead of the break-even target the board had set.

In the insurance sector, Bohai Property Insurance Company commenced operations in 2005, and is also primed to take advantage of financial reform. According to Wang Jiandong, general manager, Tianjin and the Tinjain Binhai New Area boast the highest potential growth rate for insurance anywhere in China. The insurer has already grown rapidly: it now has 19 sub-offices across China and achieved RMB740 million in insurance fee income last year. “Insurance will be a key area in these comprehensive reforms, and Bohai Insurance will take advantage of its pilot status,” says Wang.

Specifically, the insurer may be able to take advantage of the cross-disciplinary approach being tried in the pilot scheme, and so venture into life insurance and asset management. It may also be permitted to use its capital in a way that insurers have not previously been allowed to do: suggestions from the State Council suggest insurers may be permitted to invest in the equity of financial organisations, industrial investment funds, and infrastructure projects. It is also likely to foster innovation in products, in customer services, and in distribution, with the company planning to try telemarketing and web sales among other things. Many other areas of financial reform – foreign exchange, mixed operations, the OTC market (see below) – should bring with them opportunities for new insurance products while the vibrancy in the manufacturing sector with the arrival of foreign manufacturers like Airbus is also good news for an insurer. “All these investors bring us the chance to provide services,” Wang says.

Another exciting development is a new arbitration centre. “This has significance in two aspects,” says vice mayor Cui. “The service this arbitration centre provides is focused not only on Tianjin, but the region around Tianjin. And it will work not only according to domestic laws but international laws.” The centre, which will have a higher status than the court and local arbitration institutes in China, will “provide the development of a complete legislative environment,” he says.

A fourth item of reform concerns foreign exchange, with some special policies to be tried out in Tianjin. The State Administration of Foreign Exchange has approved the trial of these measures – and with foreign exchange being one of the areas that foreigners watch most closely in China, it represents another example of Tianjin’s growing status.

Specifically, controls will be loosened over foreign exchange under the capital account, and ways will be explored to allow renminbi capital account convertibility in certain areas and within set amounts. The management of foreign exchange under the current account will also be improved, and in time residents and enterprises may be able to buy and sell foreign exchange voluntarily.

As part of these measures, banks will be allowed to develop offshore finance in Binhai, which should facilitate exchange between foreign lenders, borrowers and investors. It will mean there is no limit to the amount of foreign exchange that can be transferred between bank headquarters and branches, while the threshold for individuals to hold shares in foreign listed companies will be lowered. Announcing these measures in 2006, the then mayor, Dai Xianglong, referred to Tianjin as “the icebreaker for the country’s financial reforms.” In theory, these reforms should stimulate foreign trade and held to boost the coastal areas around Tianjin.

The fifth area of financial reform will involve the establishment of financial markets. In particular, Tianjin will host the first national over the counter (OTC) market in the country. It will also be home to a climate exchange, along the lines of the Chicago Climate Exchange – unquestionably, a landmark development which will be closely watched worldwide. Du says the government has been in extensive dialogues with China National Petroleum Corp [PLEASE CHECK – TRANSLATOR WAS NOT SURE]and CCX to help develop this exchange; “We have worked on this draft plan for over a year, so I think this market will soon be established,” he says. It is a vitally important market for China and the world. As Vice Secretary-General Chen says: “We work for the whole nation to reduce pollution, clean the air and provide a good environment for the market.” A third new market, for the exchange of property rights, is also envisaged.

The sixth and final area of reform concerns the environment for a financial services centre. “To give support to the financial sector we have issued policies in finance, tax, commerce and registration,” says Du. This includes background support for financial institutions, domestically and internationally. As things stand there are already three financial services areas in Tianjin – downtown in the city itself, Finance Street in TEDA, and a district called Yujiapu financial area, which is under development and aims to serve the whole of the Binhai New Area. But in order to ensure financial services businesses have the right support, a fourth area will be established, to serve entities like funds and leasing businesses, between the city and the New Area.

The TBNA is already home to an active financial services industry. By the end of 2007 there were 26 banks located in the area, with 6,300 employees, and with seven foreign banks among them. Their assets grew 29.7% in 2007 alone. There are 447 bank offices and connecting points, alongside non-banking organisations and 68 insurance organisations with a further 3,200 employees. There are 10 operational offices of securities companies.

It is interesting to note that the banks in the Binhai new area have on average a lower non-performing loan rate than is the case in the rest of the country. The national figure is 5.6%; in the new area, just 2.4%, according to Chen Fang, chief of the financial and investment development bureau at the administrative committee for TBNA.

Factors like these are attracting more and more foreign enterprises. All told, within TBNA or the city of Tianjin, foreign branches include Standard Chartered, BNP Paribas, HSBC, Credit Lyonnais, Societe Generale, OCBC (from Singapore), Chase Manhattan Bank, and Japan’s Sanwa and Sakura Banks.

Also very prominent are Korean banks, drawn by the proximity of Tianjin’s port to Korea. One, Korea Exchange Bank, decided in January 2008 to put its national headquarters for China in Tianjin.

Why? “We believe, in this new century, the economic development of China is happening here in Tianjin and the Circum Bohai area,” says Kwang Hyun Lee, general manager of the Tianjin branch of Korea Exchange Bank. “It is the engine for the whole of northeast China’s economic development.”

KEB considered Shanghai and Beijing as national headquarters, which are more commonly used as national headquarters. But Lee recalled the days when people knew of only one tall building in Shanghai, the Pearl Tower, and wondered why they should bother to invest there. “After 10 years development we can see how mature it is. The same story and miracle will definitely happen here in the Binhai New Area. We should grow together with it.”

In fact, KEB first set up in Tianjin in 1993, because so many of its Korean clients had chosen the city as a location. Many of these clients are engaged in logistics and the chemical and oil sectors, which makes Tianjin a natural home for them. Other Korean institutions have had the same experience, such as Industrial Bank of Korea, a policy-oriented bank mandated to support small and medium sized enterprises – many of whom have gone to Tianjin as suppliers to bigger multinationals like Samsung or Hyundai. “Tianjin was our first step to invest in China,” says Moon Ho Sung, general manager of the Tianjin branch. “We have more than 10 years history here.” The pilot reform programme will give it opportunities to grow from its core SME business into other areas, perhaps including securities, insurance or offshore financial services.

In the future, people are likely to look back at the pioneering efforts taking place in Tianjin as some of most visionary and influential reforms affecting Chinese business and finance. The city and new area have been given an outstanding opportunity to help China move forward in financial innovation, and they are determined to seize that chance.

 INFRASTRUCTURE

A vital part of Tianjin’s attraction is the outstanding transport infrastructure linking it with the country and the world. “Tianjin is one of the cities under direct management of the central government,” says Zhang Xiaoguang at the Tianjin Municipal Development and Reform Commission. “So we have a complete transportation and infrastructure system.”

The port is perhaps the most visible part of this, having been a mainstay of Tianjin’s development for over 150 years. Today, it is the largest cargo port in North China, with an annual handling capacity of more than 310 million tons and 7.1 million TEUs, with the latter figure expected to pass 10 million by 2010. It is already linked with more than 300 ports from 170 countries and regions worldwide, and is the subject of ambitious expansion plans, growing from its original 40 to 100 square kilometres. Construction is underway on a 250,000 ton deep water channel and a 300,000 ton crude oil dock. The emergence of the Tianjin Port Free Trade Zone, the largest free trade area in northern China, will help it to grow. Ten square kilometres of the port are given over to Dongjiang Bonded Port, the largest bonded port zone in North China.

Although the city is easily reached through Beijing Airport, Tianjin Binhai has its own landmark international airport, which will have a 5.6 million passenger capacity and a 500,000 ton cargo capacity by 2010. This is envisaged as the air freight centre for north China.

Before the Olympic Games, Tianjin’s heavily redeveloped railway station will open, featuring a high-speed train that will carry passengers to and from Beijing in just 30 minutes – an extraordinary feat of engineering. This is only part of a major railway network through Tianjin; there are six major railways in all directions, as well as an inter-province metro. A high speed train is also envisaged to link Beijing with Shanghai, passing through Tianjin. The Beijing train will extend to join a commuter line between TEDA and Tianjin by 2009.

Tianjin is at the heart of one of the country’s best networks of roads, including nine expressways, six inter-province highways, and with a further two expressways between Beijing and Tianjin near completion to complement the existing one. Zhang says the combined total of expressways, at 700 kilometres, is the highest of any Chinese city.

This transport infrastructure makes it easier to do business with and through Tianjin, and cements the area’s standing as a hub both for the development of North China, and for trade with the rest of the world.