Banking on a future with China

British finance veteran encourages greater UK-China cooperation for mutual benefit

The Chinese and British economies will be increasingly complementary as China achieves its structural shift from high growth to sustainable development, says Peter Batey, chairman and founder of the boutique investment bank Vermilion Partners.

Batey, former political private secretary to the British Prime Minister Edward Heath, who helped establish full diplomatic relations between the UK and China in the 1970s, says China and the UK have great potential to cooperate more in education, healthcare, financial services, creative industries and other service sectors.

"In the past, China had a strong trading and investment relationship with countries like Germany, which had great manufacturing strength, but now as China focuses on high value added growth Britain will be an increasingly important partner," Batey says.

Batey, worked for Sir Edward Heath from 1982 to 1986, and has lived and worked in China since he left his position as the head of Heath's private office in 1986. He has witnessed the massive transformation of China over the past 30 years.

He first accompanied Heath to China in 1982 - the first of many trips - when they visited Beijing, Chongqing, Yichang, Wuhan and Xi'an. After ending his work in politics, Batey moved to Beijing to help establish the China presence of accounting firm Arthur Andersen, subsequently becoming its chief representative in China. In 1989 he and business partner Richard Burn co-founded Batey Burn, a China-focused investment advisory and government relations business.

In 1999 Batey became chairman of APCO Asia Ltd, after APCO acquired Batey Burn. Batey left APCO Asia in 2004 and co-founded Vermilion Partners in 2005. The firm has grown to about 60 people globally, of which 45 are based across China, in Beijing, Shanghai, Shenzhen and Hong Kong. In Europe, the firm has offices in London and Munich and intends to open an office in New York this year.

Over the past 30 years, Batey has witnessed a great transformation in the Chinese economy, and these transformations are mirrored by changes in the type of investment banking advisory work the Vermilion team has done in China.

"When I first started working in China in the 1980s, much of the work was in helping foreign companies export to China or to evaluate whether it was worthwhile establishing a joint venture in China to produce for export. In those days foreign investment was primarily via joint ventures and joint ventures were required to export most, if not all, of their production."

"By the mid-1990s, the Chinese economy had partially liberalized and we started to increasingly help foreign firms to set up both WOFEs (wholly owned foreign enterprise) and joint ventures in China, to address China's domestic market but also to use the China operation as a base to export to other markets," Batey says.

But by 2000, more and more opportunities emerged for foreign firms to acquire Chinese firms, as a way to expand fast into the China market, adding another important element to Batey's work.

"Now we do all three. But a new and important trend emerging in recent years is Chinese companies going overseas to acquire international companies, and this is an exciting area of business for us," he says.

Over the years, China's regulatory restrictions have reduced, but the regulations and policies became more sophisticated and detailed, Batey says.

"Gone are the days when you could write China's regulations on a few sides of A4 paper, now there are many thick documents setting out rules. This is helpful because it sets out clearer guidelines on business activities, but there remains wider discretion for officials to interpret regulations than investors from Western jurisdictions are used to," he says.

At the same time, Batey says the Chinese government has done good work in liberalizing its economy and is now working to encourage domestic competition and break down monopolies.

"I think a lot of progress has been made in this area, although it is a gradual process that will need five to 10 years or more to complete. The first step is to introduce private capital into industries and sectors traditionally dominated by state-owned enterprises, and the second stage, I hope, is also to allow foreign capital into these sectors," Batey says.

He says in sectors like petrochemicals and energy, there is still a high degree of restriction for foreign investment, so that foreign firms can only operate in joint venture with Chinese partners and often the equity stake they are allowed to own is capped at 50 percent or below.

"Such restrictions can no longer be justified. China has been a member of the WTO for almost a decade and a half and Chinese firms are now investing abroad in sectors where foreign investment in China is still restricted. It is reasonable for Chinese investors overseas to expect a level playing field and for foreign investors in China to expect the same," Batey says.

The financial services sectors should also be liberalized more, particularly banking and insurance. Currently banks and insurance firms' speed of growth is restricted in China by the amount of time they have to wait to open additional branches, which has kept their market share in China very low, Batey says.

Meanwhile, Chinese investments in the international market have grown rapidly, although Batey says Chinese investors are still in the early part of a steep learning curve to understand how to navigate different markets in different countries.

Batey says Chinese investment abroad was traditionally characterized by investment in natural resources, like oil, gas and minerals, as these resources were essential in fueling China's rapid economic growth.

However, the situation has changed in recent years as Chinese overseas investment also focused on buying new technology through acquisitions of overseas firms. These technologies can then be deployed in China to help the country grow.

Most recently, Chinese firms' overseas acquisition strategies have focused on buying controls for route to market, so that they may distribute their own goods to a wide variety of international markets. They are also buying know-how and brands from international industry leaders, to take to the Chinese market.

Batey says he has been fascinated by China ever since his first visit to the country. "I found the Chinese economy fascinating, as it presented such a different dynamic, and I wanted to understand how it works."

At that time, China was operating as a centrally planned economy, which is an economic structure different from that which with Batey was familiar, coming from an open market economy like the UK.

He recalls one story in the fall of 1987 when he traveled from Tianjin to Beijing. The car journey that was supposed to take three to four hours ended up taking twice as long because many of the roads and streets were blocked by lorries carrying 'da bai cai', big white cabbages, which were a winter staple in North China in the days before fresh vegetables were widely available across the country all year round.

"The streets of Beijing were also choked with cabbages piled on street corners, presumably because the planning bureau had got it wrong and produced about three times what the market needed. People didn't know what to do with the extra cabbages," he says.

They were briefly renamed 'ai-guo bai cai' (patriotic cabbages) and Beijing's citizens were encouraged to consider it their patriotic duty to buy many more cabbages than they would normally have stored on their balconies to consume during the course of the winter.

Batey also noticed on his first visit with Heath that the Chinese people had keen entrepreneurial instincts. He remembers when he visited the country in 1983, there were already people setting up markets to sell products as free market policies were just being established. Entrepreneurship was emerging quickly in a country that had, for decades, discouraged and even punished private enterprise. The seeds had just been lying dormant and sprang to life at remarkable speed.

"These people didn't have good jobs that paid well, so they took the initiative to set up their own businesses, which is very entrepreneurial," he says, adding that he believes such entrepreneurial spirit has always been in Chinese people's blood historically.

As much as Batey's early experiences traveling in China influenced his view of the country, he says that his observation of the way in which Heath regarded China and the way he conducted his interactions with Chinese leaders has influenced the way he treats his Chinese partners and clients.

"Mr Heath understood that a good relationship with China is good for the UK, but he also knew that because of the historical and cultural differences between the two countries they would not always agree on everything. Therefore friendship is built by making a strong effort to understand and respect each other," he says.

Batey has since taken such an attitude to work, helping his Chinese and Western clients understand and respect each other's views. "So without the need always to agree on everything, they can still cooperate on a business level effectively and achieve mutually beneficial results," he says.

cecily.liu@chinadaily.com.cn

(China Daily European Weekly 03/06/2015 page19)