Straight Talk's Eugene Chan interviews Dr Weijian Shan (right), a member of the International Advisory Council of Hong Kong Exchanges and Clearing, March 14, 2023. (PROVIDED TO CHINA DAILY)

Member of the International Advisory Council of Hong Kong Exchanges and Clearing Dr Weijian Shan is on the show this week.

As a private equity investment expert Dr Shan says while some business and certain sectors are not healthy, private equity, or PE, can turn them around and actually grow for profit. While in the US, as interest rate is rising, cost of capital to borrow is higher, creating a negative impact for PE to do buyout. But in Asia, mainly in the Chinese mainland, relatively low inflation and low interest rate means there's no pressure for borrowers to pay interest rate, thus creating a more favorable condition for PE to do buyouts.

He says for China to sustain growth, tech investment must be maintained, thus benefiting investors in the sector. He also thinks Chinese banks are still healthy, which is important for economic growth.

Check out the full transcript of TVB’s Straight Talk host Dr Eugene Chan’s interview with Dr Shan.

Chan: Good evening! This is Eugene Chan on Straight Talk. Our guest this evening is Dr Weijian Shan. Weijian, who is better known as Shan within the financial services industry, is a successful private equity investor, an accomplished author of three best-selling books. He is the executive chairman and co-founder of PAG, an Asia-based focused private equity firm with more than US$50 billion in capital under management. He's also a member of the International Advisory Council of Hong Kong Exchanges and Clearing Limited and the trustee of the British Museum. This evening, we are going to see if Hong Kong is connecting the dots in the financial services industry, and connecting China with the rest of the world. Welcome, Shan!

Shan: Thank you very much, Eugene. Good to be here.

Chan: Thank you. Shan, as you know, private equity is a term that many people have heard. But for the interest of the viewers, can you tell us very briefly, what exactly is private equity? And what do you do?

Shan: Private equity in a nutshell, is to use other investors’ money to make investments in not public companies, but mostly unlisted companies. You see, hedge fund, for example, would raise capital from investors, they invest in the stock market buying stocks, that is stocks of public companies, we typically invest in companies which are not public. And that's why we're called private equity, as opposed to public equity.

Chan: Right. So, how important is this private equity business in terms of … in the comprehensive financial industry in general?

Shan: This industry really came into being in late 1980s, 1990s. In the United States, with the first notable deal was KKR’s acquisition of a food company called RJR Nabisco, which was a $25 billion transaction. And for that transaction, somebody wrote a book about it called ‘Barbarians at the Gate.’ And that was probably the start of this industry, private equity industry that is collecting capital from investors making large acquisitions in non-public companies. Today, there are twice as many firms controlled by private equity in the United States as publicly listed companies. That's how large it is. And therefore many very large, iconic companies are owned and controlled by private equity in the world today.

Chan: Right, Shan, I refer to your recent book that you mentioned that was a … illustrating investment buyout from a US-based company, achieving what we call an impossible deal of what we call an ailing National Bank in the mainland, and transforming it to become a healthy and very profitable financial institution. 

Shan: Correct. 

Chan: So, what are the opportunities and differences and challenges that you have come across in that particular deal, and what is your takeaway message for the viewers who are going to read your book?

Shan: Well, first of all, the title of that book is Money Machine – A trailblazing American Venture in China. It's a story about this American private equity firm, which I was a partner of, acquired a control of National Bank in China. So, it’s a very interesting story.

Chan: Yes.

Shan: That's my third book. My second book is called Money Games. The same firm I was working for as a partner, acquired a control of once the most iconic bank in South Korea, called Korea First Bank. And my first book is Out of the Gobi, talking about my experiences working in the Gobi Desert, during the Cultural Revolution. This book, this recent book, Money Machine, is really a close look at the banking industry in China, in the early 2000s, and banking reform during that period of time, and how we played a part in that by acquiring control of National Bank, which is very rare as you know, in China, or anywhere else in the world.

Chan: Right? So, what are your takeaway messages? So it's doable? But what are the challenges that you face that will be notable?

Shan: What's doable? And when the banking system at that time was very weak in China, today China's banking system is much healthier, and therefore such opportunities are not available. But there are other investment opportunities for us. I think the takeaway is from investment level, it is very important to understand how investors like ourselves private equity really creates value. You know, it's not by buying low and selling high, it is by acquiring, sometimes aiding businesses, that is troubled businesses, and using our skills, knowledge experiences, and international best practices to turn them around, improving the operation, and then increasing the value or create value, and eventually exiting with a profit. And that opportunity exists everywhere. But at the national level, for every society, it is very important to have a healthy banking system. And when the banking system is not healthy or weak, it is necessary to reform it by utilizing capital sources like ourselves private equity.

Chan: Right, Shan. The story that you mentioned in the book happened like over a decade ago and a lot has happened since then, of course that includes COVID. Now that all the lockdown and the restrictions have been lifted, and the thing that you mentioned in the book called due diligence and onsite due diligence and relationship building can be back again, will you call business back to normal yet?

Shan: The problems that we encountered in the story I told in the book happen all the time anywhere in the world. Just last weekend, one major bank failed in the United States, the largest bank since 2008, to fail, and that is Silicon Valley Bank. And it's the second largest bank failure in American history, after Lehman Brothers, and that presents some risks and opportunities for investors. When it comes to Hong Kong, of course, last three years were very difficult. And I think that after the lifting of COVID restrictions, towards the end of last year, things are coming back to normal. And I hope it will continue. Because Hong Kong is very important as the international financial center, especially here in Asia, and we play a unique role in this regard. We, meaning Hong Kong.

Chan: Right, Shan. Another topic that we often talk about at Straight Talk is the geopolitical tension. How has that impacted businesses on the financial industry, especially the private equity side?

Shan: Well, so far, the impact has been limited. Because we have seen that Hong Kong is the international financial center, and 10 percent of our population are expats that is foreigners living here. But that is an understatement for the financial sector. In the financial sector, there are many more international representation and foreign banks, and foreign personnel, and so forth. So, I think that Hong Kong will continue to play this role, without regard to geopolitical risks. Sometimes circumstances are beyond our control. And sometimes we'll have to take measures to hedge our risks as the financial industry. But I think by and large, Hong Kong has characteristics that nowhere else, either in Asia or elsewhere in the world have which make us unique as financial center, I'll be happy to go through those factors, and those characteristics with you.

Chan: Right, in terms of private equity investment, China, including Hong Kong, simply draws no comparison in Asia. In the past, I'm sure many of your investors be it general or limited partners, but from the developed world looking to share a bit of the booming Chinese economy. So, have they now become a little bit more hesitant? Or are they still very bullish on the mainland?

Shan: See, Hong Kong is a financial center. So, firms like ourselves are in Hong Kong to operate across the region. Now we don't make much investments in Hong Kong as we do on the mainland, in Japan, in Korea, Southeast Asia, India, Australia, all over Asia. And therefore, it's not so much Hong Kong that we focus on, it’s the entire Asia that we focus on. So, in this regard, Hong Kong facilitates our activities all across the region.

Chan: Right. So, from your experience, what will be the recent notable trends in the business, you just said, that sometimes things are out of your control, you just got to hedge your risk. What is your outlook for say 2023 and 2024? What is your outlook for the private equity business?

Shan: Well, I just mentioned that in order to be a financial center, you require a number of characteristics, which are necessary conditions for a financial center, that includes free flow of information, which we have; free flow of capital, which we have; convertible currency, which we have; and we need rule of law, independent judiciary, which we have; and we're English speaking, as well as Chinese speaking; and more importantly, we're low tax, right. But there's one factor, which we have, Singapore doesn't have, for example, that is adjacent to a large economy. And that is the mainland. The mainland economy, Chinese economy, is now three and a half times the size of Japan, six times India. So, it’s a very large economy, 80 percent of the US economy. In order for Hong Kong to do well, the Chinese economy has to do well. And last year, it was very challenged. As we all know, economic growth rate was only 3 percent. I expect the Chinese economy to do much better this year than last year. And therefore that should bode well for the Hong Kong economy, and for Hong Kong as a financial center.

Chan: Right. Thank you, Shan. Let's go to a break now. We will be right back viewers, do stay with us.

Member of the International Advisory Council of Hong Kong Exchanges and Clearing Dr Weijian Shan attends the Straight Talk show on TVB, March 14, 2023. (PROVIDED TO CHINA DAILY)

Chan: Welcome back to Straight Talk! We have been talking with Dr Weijian Shan about private equity and Hong Kong’s role in this area. So, Shan, in the first part of the show, you mentioned categorically Hong Kong, as a financial center, had all the characteristics, and one very notable advantage we have compared to Singapore, we are right next to one of the largest economy in the world, Chinese mainland. With Hong Kong’s role being an international financial center, but with all the industries arising, and all of the opportunity cost, that means it’s on the rise because it is just going up, how does this affect the actual business and perhaps out of Hong Kong, because people do have to borrow money and invest?

Shan: Yes, let me just talk about how rising interest rates affect our industry, private equity industry. Our industry is very often referred to as buyout, we buy control of businesses. And in my third book Money Machine, we talked about the acquisitional control of national bank in China, that is a buyout. And sometimes the things we do are referred to as leverage buyout. Leverage meaning we borrow money to do the buyouts, mix it together with equity capital, that capital mixed together with equity capital to do buyouts. Obviously when interest rate rises, then the cost of capital, the borrowing, becomes higher. And that would actually have a negative impact on the ability of private equity firms to do buyouts. So, in the first, I would say, three quarters last year, if you look at the buyout industry in the United States, the mergers and acquisition market, the volume has come down 50 percent because of rising interest rates. But in Asia, we are actually in a very different situation. The reason that interest rates are rising in the United States or have been rising in the United States is because of high inflation. So, in the Federal Reserve system and central banks across the western world are raising interest rates, in order to contain inflation. But our largest market, as I mentioned, is Chinese mainland. What is the inflation rate there? Last month it was 1 percent; last year it was less than 2 percent. So, inflation is not an issue. And therefore, in China’s market, interest rates last year have been falling, slightly but have been falling. And therefore there is no pressure for the borrowers to pay more. And if you look at other parts of Asia, like Japan, Japan’s inflation rate is also quite tame. And the benchmark interest rate there is -10 basis points, that is -0.1 percent, it is still a negative interest rate. And therefore what is happening in the western market is not really happening so much in the Asian market. So, in this part of the world, I must say that the conditions for buyouts for private equity investments are actually more favorable, even though interest rates are rising elsewhere. Hong Kong is a little different, but very few people do large buyouts in Hong Kong, they use Hong Kong as a base to invest across Asia. Hong Kong’s currency is pegged to the US dollar, so we have the HKMA, Hong Kong Monetary Authority is our sort of central bank, but the interest rates are more or less set by the US central bank because our currency is pegged to them.

Chan: Right. So, it is definitely a very different picture with the mainland. Another area that we want to look at is … I look at some of the past that, many gigantic or attractive PE deals over the last few decades, like you who contain the lines, involves firms in the technology sector. At the same time, there seems to be tighter regulations now, that especially those firms possessing data. So, how does it affect the sentiment of the overall investment market? Do they … I mean are they going to be more… less keen to invest in technological firms?

Shan: No. A lot of money has been made investing in technology sector, in new economies. I think that all over the world there is a concern about big tech, about data security, and therefore certain regulations have to be put in place. Sometimes it takes a long process to put some regulations or rules in place, which I think are necessary, that is, the processes are necessary because you want the market to digest information. And if regulations and rules are put in place too quickly, too suddenly, that may rattle the market. I think we have seen some of that on the mainland market. And I hope going forward, when we see new regulations and rules, there will be more of a process, and therefore there will be more transparency and prior warning to the market, and there will be more stability. I think that by and large, large countries like China, if you want to sustain its growth, it is very important to increase its productivity. And that is R&D, research and development, that is technology. And that is how you drive economic growth, and that is where there are opportunities for investors.

Chan: Shan, in your book you do talk about the deal involving a bank, bank loans remained the main financial means for the corporates on the mainland if I am not mistaken. At the same time with COVID and the incidents in the last few years, it appears that some corporates may not be financially that healthy. So, as an expert, do you think there will be soaring non-performing loans coming up? Any event?

Shan: I would say so, I would say so. If you look at the Chinese banking market, obviously in the past two years, the amount of bank loans, which we call non-performing loans has increased. But I think the entire banking system remains quite wealthy. The average non-performing loan ratio in Chinese banking system is now 1.6 percent, at this particular point. And the average capital ratio for these banks is about 12 percent, more than 10 percent. And therefore these banks remain very healthy. So, even though some bank loans are created, they also being resolved and disposed of fairly quickly. And by and large I don't see systemic risks in the Chinese banking system. By and large, I think the Chinese banking system is rather healthy at this point, it will remain a major source of financing for firms, and that is very important for economic growth.

Chan: Right. Shan, I have to refer back to your book again. It was very interesting when it talked about what you actually just said.

Shan: Which book? Money Machine? Money Machine. Yes, it is a banking reform. 

Chan: What is your take on the recently announced government regulatory structure reform? I mean what are the implications for the industry? Is it going to make the mainland even more attractive for people to have confidence in the upcoming years?

Shan: You are talking structural reform as discussed in my book or structural reform today?

Chan: Both.

Shan: Well, you see in the early 2000s, as I described in the book, the Chinese banking system started out in around 2000 being very weak. And that was when China started to reform its banking system. It carved out all the bank loans from major banks into asset management companies or what we call bag banks. And then they brought in foreign capital to re-capitalized these banks, but also to bring in the so-called international best practices, in terms of risk management, in terms of how you manage the banks more efficiently. So, there was a wave of banking reforms in the early 2000s. It was against that setting, against that background, we Newbridge Capital, of which I was founder at the time, acquired the control of a national bank in China. But today, the banking system, as I just mentioned, is rather healthy and resilient. So, similar opportunities don't exist that I can see in the Chinese market, but opportunities like this pop up everywhere, in banking and elsewhere. I just mentioned over the weekend Silicon Valley Bank in the United States failed, and that is a good example of how circumstances may change, market conditions may change at any time, presenting opportunities to those who are prepared… 

Chan: Right.

Shan: …for the experienced, for the knowledgeable, who have done it before.

Chan: Shan, we have come to the last part of our show. And I must ask you a personal question because I have been reading your background and definitely your story is an inspiring one. You were raised in a one-room home in Beijing during Chairman Mao’s time, sent to the Gobi Desert to work for less than a dollar an hour, endured hunger and cold…

Shan: No, no, not less than a dollar an hour, less than a dollar per month. 

Chan: Per month, even less. Endured hunger and cold, and even burning cow dung as fuel. You received no formal education, secondary education, you actually taught yourself maths. So, you overcame all these hurdles, and now you are the chairman and CEO of one of the largest private equity firms in Asia worth over $50 billion. So, what is your advice to our youngsters in Hong Kong or even the world in the financial industry? Is private equity an area that they should all go in and develop, and make a big day like you have?

Shan: The reason that those people who were qualified to go to America to study was because they never gave up under adverse circumstances.

Chan: Right.

Shan: So, they continued to study, like myself, to educate ourselves. Eventually, when the opportunities presented themselves, we were able to capture it. So, my advice to young people is to keep studying. 

Chan: Alright.

Shan: Keep enriching your knowledge and keep being prepared. And opportunities may come or may not come, but when opportunities come, you want to be able to capture it. And that is you have to be prepared by yourself. 

Chan: Right. We want to thank Weijian Shan for sharing with us how Hong Kong can join the dots for our nation. This is indeed what our city can do well, and being a super-connector between the mainland and the world. Have a good week and good night!