The Concept of "Face" and the Meaning of "Don't Want Face"

Concepts dealing with "face" can be difficult to translate. "Bu yao lian," which means, literally, "don't want face," is a case in point. To understand this phrase, you need to appreciate that in Chinese culture "face," or how other people view you, is very, very important.

It's important in non-Chinese cultures too, of course, but even more so in places like China, Taiwan, Singapore and anywhere else where there's a majority of ethnic Chinese.

"Bu yao lian," therefore, means that you don't care about your "face" - how others view you. You have no shame, you're shameless, and this is considered a bad thing.

For example, my wife and I had no more use for a stroller and wanted to throw it away. It was in perfectly good shape, but we didn't need it any more and didn't know who to give it to. (And we didn't want to go through the hassle of selling it.) So we put it out on the curb, hoping a passerby would take it.

Someone did take it, eventually, and that person happened to be a close neighbor. Now, every day, I see my neighbor taking her child out on the stroller, our old stroller. "Bu yao lian" would apply to her. Not because she took the stroller, necessarily, but that she knew it was ours and would be using it in full view of us. To put it bluntly, she was using our cast-off item, our "garbage."

Here in the United States some people might think my neighbor's behavior a bit odd - and I, of Northern European descent, admit I feel a touch awkward when I see her. But I shouldn't, really, right? My neighbor is actually smart. She got a perfectly good stroller for nothing and is making good use of it.

But in Chinese culture her behavior would constitute a loss of face, and to so blatantly act in such a way would mean my neighbor doesn't care about face. This is a big no no.

To confuse things, there are actually two terms for face in Chinese: "lian" and "mian zi." Traditionally, "lian" would refer to issues of moral character and personal integrity, whereas "mian zi" would mean a person's image in society.

A loss of "lian" would then be much more important - meaning you are bringing shame and disgrace to yourself and family. A loss of "mian zi," on the other hand, would mean you don't care about your public image, and in some cases this can be interpreted as a good thing: that you're genuine, "down to earth."

As with all languages, however, Chinese is changing, and "lian" and "mian zi" are be used more and more interchangeably, especially among the young. If you visit chat boards, for example, you'll see people calling each other "bu yao lian" over the smallest things.

You'd think the above case of the stroller would be about "mian zi," but when I was living in Taiwan this would have merited a "bu yao lian!"

Source: "Communicating Effectively with the Chinese," by Ge Gao, Ko Kao, Stella Ting-Toomey; SAGE Publishing, 1998

"China Won't Loan to U.S. Banks" Story Untrue

Hong Kong's South China Morning Post reported on March 25 that domestic Chinese banks had been told to stop lending to U.S. financial institutions to shield the country from the unfolding financial crisis. ("Mainland lenders ordered to halt interbank deals with US firms," Sept. 25, 2008, Hong Kong time.)

Dow Jones Newswires later refuted the story in an article based on an interview with an official from the China Banking Regulatory Commission. ("China Regulator: Report On Halting Lending To US Banks Untrue," Sept. 24, 2008, 11:22 p.m. E.T. )

"I've never heard of this. It's ungrounded," the official told Dow Jones Newswires.

China's central bank is one of the world's biggest buyers of U.S. Treasury bonds. Chinese government-owned financial institutions also hold significant quantities of U.S. equities.

China Investment Corp., for example, a $200bn sovereign wealth fund, owns large stakes in both the private equity firm Blackstone Group and Morgan Stanley, according to the Financial Times.

As stock prices have slid, they have lost a great deal on both these investments. Because of this, China has resisted buying further stakes in U.S. financial institutions, and has stayed on the sidelines while the U.S. financial crisis has expanded.

Chinese officials apparently don't want to be seen as investing "dumb money," the Financial Times reported ("Prudence guides China's outlook," Sept. 24, 2008).

Short Chinese Stocks with the FXP ETF

Chinese stocks have ended down six days out of the last ten. Whenever that happens there is inevitably talk that we've entered a “bear market” - that stocks are trending downward.

Investors in Chinese equities are particularly sensitive to such speculation because many of them have seen their holdings skyrocket since the end of 2005. Chinese stocks as a whole have risen five hundred percent over the last two years, and more and more analysts are saying a market correction is overdue. Investors know this party can't last forever.

I'm not an investment expert, so I can't tell you whether this is true, but let's assume for argument's sake that we have, in fact, entered a bear market in Chinese stocks. What should you, as an investor, do?

The answer is simple. You should short Chinese stocks – bet against them – and there's an easy way to do this: buy shares of a bear market ETF. One bear market ETF that's used to short Chinese stocks is called the ProShares UltraShort FTSE/Xinhua China 25; its ticker symbol is FXP and it's from the ProFunds family of funds. FXP made its debut on Nov. 8, 2007, and has gained quickly in popularity. Today, for example, it was traded more than 1.8 million times on the stock market, according to data from Yahoo! Finance.

The "ultra" in the name of this ETF indicates it produces turbo-charged returns: it rises two dollars in value for every dollar lost by the FTSE/Xinhua China 25 Index. Of course, the reverse can happen too; it'll fall two dollars for every dollar rise in the same index. The FTSE/Xinhua China 25 Index tracks the 25 largest and most liquid Chinese stocks listed and traded on the Hong Kong Stock Exchange.

The top ten companies tracked by this index are the following: China Mobile, Ltd., China Life Insurance Co., Ltd., PetroChina Co., Ltd., Industrial & Commercial Bank of China, China Construction Bank Corp., Ping An Insurance Group Co. of China Ltd., China Shenhua Energy Co., Ltd., CNOOC Ltd. (an oil company), China Telecom Corp., Ltd., China Merchants Bank Co., Ltd.

FXP, in terms of performance, attempts to be the inverse (doubled) of FXI, the iShares FTSE/Xinhua China 25 Index Fund, which is part of the Barclays Global Fund Advisors family of funds. This is a regular, non-bear-market ETF. I have found that, in practice, FXP does not precisely perform the opposite (times two) of FXI, but it comes pretty close. Today, for example, FXI was up 5.66% while FXP was down 9.43%, per Yahoo! Finance.

If you're like me and the wild swings of an “ultra” fund make you nervous – and these swings can be huge in today's volatile market environment – you may want to “hedge” your bear market FXP with FXI. For example, invest an equal amount in each. With such a portfolio, you would still be betting that the market would go down, but you wouldn't lose as much if stocks temporarily moved in the opposite direction. (The downside is that you wouldn't earn as much either, if the stock market does, indeed, go down.) Two other China-focused ETFs to consider as hedges against FXP are PGJ (Golden Dragon Halter USX China Portfolio Fund) and GXC (SPDR S&P China ETF).

The FXP exchange-traded fund charges a management fee of 0.75% and has an expense ratio of 0.95%. These are charges you will pay in addition to regular trading commissions whenever you buy or sell the ETF.

NOTE: You invest at your own risk. The author and this website cannot be held responsible for investment losses incurred by readers of this article. (Be careful. You could lose your shirt.)

Comparing China-Focused ETFs: FXI, GXC, PGJ

Want to invest in Chinese stocks but don't know enough about individual Chinese companies? You may consider investing in China-focused ETFs.

Probably the three most well-known China-focused ETFs traded on U.S. stock markets today are FXI, PGJ and GXC. FXI (iShares FTSE/Xinhua China 25 Index Fund) has been around the longest and is traded the most of the three. It's part of the Barclays Global Fund Advisors fund family and tracks the performance of the 25 largest and most liquid Chinese stocks listed and trading on the Hong Kong Stock Exchange.

PGJ (Golden Dragon Halter USX China Portfolio Fund) was created a couple months after FXI and is part of the PowerShares fund family. It's not as popular as FXI, but is being traded more and more. PGJ tracks an index which is comprised of U.S.-listed securities of companies that derive the majority of their income from China.

GXC (SPDR S&P China ETF) is part of the State Street Global Advisors Fund family and only made its debut early this year, so it's not traded as much as the other two. It tracks an index that includes publicly listed China-based companies whose shares are legally available to foreign investors. This means GXC is more like FXI, and less like PGJ.

It's interesting to note that although FXI is the most popular of these China-focused ETFs, it is the most expense to buy and sell. (Its expense ratio and management fees are higher than those of PGJ and GXC.) At the same time, FXI is not performing as well as GXC or PGJ, year to date. (Based on data provided by Google Finance.)

Below I have listed each of these China-focused ETFs and included their performance (since Jan. 1, 2007) the fees they charge, and the ten largest companies in the indexes they track.

iShares FTSE/Xinhua China 25 Index Fund
Ticker: FXI
Performance: +44.68%
Inception date: Oct. 5, 2004
Gross expense ratio: 0.74%
Management fee: 0.74%
Ten top holdings: China Mobile, Ltd., China Life Insurance Co., Ltd., PetroChina Co., Ltd., Industrial & Commercial Bank of China, China Construction Bank Corp., Ping An Insurance Group Co. of China Ltd., China Shenhua Energy Co., Ltd., CNOOC Ltd. (an oil company), China Telecom Corp., Ltd., China Merchants Bank Co., Ltd.

PowerShares Golden Dragon Halter USX China Portfolio Fund
Ticker: PGJ
Performance: +51%
Inception date: Dec. 9, 2004
Gross expense ratio: 0.73%
Management fee: 0.50%
Ten top holdings: Suntech Power Holdings Co., Ltd., China Mobile Ltd., PetroChina Co., Ltd., Baidu.com Inc., China Netcom Group Corp. (Hong Kong) Ltd., China Petroleum & Chemical Corp., China Telecom Corp., Ltd., China Unicom Ltd. (a telecom company), China Life Insurance Co., Ltd., CNOOC Ltd. (an oil company)

SPDR S&P China ETF
Ticker: GXC
Performance: +57% (since inception)
Inception date: March 19, 2007
Gross expense ratio: 0.60%
Management fee: 0.59%
Ten top holdings: China Mobile Ltd., Petrochina Co., China Life Insurance, China Construction Bank, CNOOC Ltd. (an oil company), China Petroleum, Industrial & Commercial Bank of China, China Shenhua Energy., Ping An Insurance, Bank Of China Ltd.

Focus Media Makes the Nasdaq 100 Index

The Nasdaq Stock Market issued a press release on Friday, Dec. 14, announcing that Focus Media Holding (FMCN), a Chinese digital-media company, had been added to the Nasdaq 100 Index. This may not sound that significant, but it is quite momentous, especially in what it says about Focus Media.

Only a select group of companies are chosen to be part of the Nasdaq 100. The index is made up of the largest domestic and international non-financial securities listed on the Nasdaq Stock Market, based on market capitalization, according to the stock exchange's official website, Nasdaq.com. To be a member of this group, the company's securities have to have an average daily trading volume of at least 200,000 shares.

Focus Media currently has a market capitalization of US$7 billion, according to TheStreet.com. What is remarkable is that this company didn't even exist five years ago, and now it has replaced Sweden's Ericsson - a global telecom company - and XM Satellite Radio on the index. These two companies were among five that were dropped from the Nasdaq 100 at the same time Focus Media and four other companies were added.

So what is Focus Media all about, anyway?

It's basically an advertising firm. It describes itself as an "out-of-home lifestyle media company," according to its website. Founded in 2003, Focus Media specializes in placing ads in shopping centers, on mobile phones, and in "high-traffic" areas, such as elevators in commercial buildings.

One strategy it has used to grab eyeballs is to place flat-panel LCD displays in areas where higher-than-average-income consumers work, pass through and shop. Focus Media claims it has 83,500 of these displays set up in 90 cities across China.

This advertising strategy seems to have made quite an impression, as Focus Media boasts more than 3000 domestic and international customers, including big brand-name conglomerates like Toyota, Proctor & Gamble, Nokia and Motorola.

Its success is reflected in its balance sheet. In the third quarter of 2007, Focus Media reported total revenues of US$151.4 million, an increase of almost 150% over the third quarter of 2006, and a rise of 33% since the second quarter of 2007. Profits have been rising 50% a year, according to BusinessWeek.

"We are confident Focus can keep growing that fast for the next two years at least," Tian X. Hou of Pali Capital (which owns shares) told the magazine.

How will it be able to achieve this growth? Through acquisitions. In 2006 it bought an equity stake in ACL, a British Virgin Islands company that specializes in placing ads in movie theaters. Focus Media now has ads running in 120 movie theaters across China.

In February of this year, the company bought Allyes Information Technology Company, a large Internet advertising service company in China. Focus Media is now positioned to place ads on the Web.

Watch out, Google and Baidu!

Foreign Company Stocks to be Sold in China

According to a recent agreement, investors in China will be able to do something that's been forbidden ever since stock markets opened 17 years ago in the Communist market economy: buy foreign stocks and bonds locally.

The deal, reached on Dec. 13 - the concluding day of the Third China-U.S. Strategic Economic Dialog, held in Beijing - states that the PRC will allow "qualified" companies to sell shares in the local currency, the yuan (renminbi); locally incorporated foreign banks will be given permission to sell bonds.

As is often the case with such agreements in China, the language is vague and few details are given. It is unknown when these stocks and bonds will start being sold, for example, and how a foreign company will qualify. But by shaking hands on it, Beijing has committed itself to this course of action. It's now only a matter of when and how it will happen.

For foreign firms and Chinese investors alike, this development is hugely significant. Foreign companies that are doing business in China (and it's assumed only these will "qualify") will be able to raise money locally to expand their operations. They will no longer have to rely solely on profits generated in China (which can take years to even appear) or cash infusions from their headquarters abroad. This will help level the playing field against local rivals that have been able to sell shares for years. Chinese investors will also benefit because they will finally get a chance to own a piece of a foreign company they've always wanted to invest in.

The investment pool foreign firms will be able to tap into is huge. China's stock markets currently trade US$4.2 trillion worth of equities, according to Bloomberg News. This makes it the second largest in Asia, after Japan. (It surpassed Hong Kong's stock market just this year.) Chinese equities have risen five-fold in value over the last two years, according to BusinessWeek, making it the best performing stock market in the world, in 2007.

Which foreign companies will make the cut? It's anybody's guess, but it's most likely that Europe's largest bank, HSBC, Hong Kong's Hang Seng Bank Ltd., Coca-Cola Co. and Siemens AG (a German firm) will be the first to sell shares locally.

If these firms do get the go-ahead and begin plying their stock in the near future, it may be at the top of the market. China's CSI 300 index is worth more than twice as much as the S&P 500 Index, Japan's Nikkei-225 Stock Average and Hong Kong's Hang Seng Index (as a multiple of 2007 estimated earnings), according to Bloomberg News.

(Other sources: Thomson Financial News, China Daily)

The powerful potential of China's drug industry

China is currently a bit player in pharmaceuticals, but its potential as a drug developer should not be underestimated.

"The capabilities of China are weak compared not only with the U.S., but also compared with India and Israel," an executive at the China-Singapore Industrial Park in Suzhou told Chemical & Engineering News. "But we're catching up fast."

It has a lot of catching up to do. Currently, there is no single organization in China that can perform all the steps involved in drug discovery. The country is known mainly for supplying mature, commodity-type pharmaceutical ingredients in large volumes.

Drug discovery does take place in China, but mostly at small start-up companies and government labs. Currently, about 100 genuinely innovative drugs are being tested in China, versus about 1000 in the United States.

What holds China's drug-development potential back is that few local drug companies have been inspected and certified by the U.S. Food & Drug Administration. Without such approval, Chinese drug makers can't export generic drugs to the United States, as Indian firms do, and therefore can't earn the large amounts of cash needed to expand internationally or invest in new drug discovery.

Things are changing, however. International drug conglomerates, eager to expand in the local market, are becoming increasingly interested in doing drug research in China.

- In 2002, Denmark's Novo Nordisk set up a 50-person drug-discovery lab in Beijing. It announced recently that it will contribute US$2 million to support diabetes research and discover biopharmaceuticals in partnership with the Chinese Academy of Sciences.

- The Swiss firm Roche set up a wholly owned R&D lab in China in 2004, the first multinational pharmaceutical company to do so.

- Novartis is constructing an R&D facility in Shanghai that it plans to staff with 100 to 150 scientists initially, to grow to 500 after five years.

- Britain's AstraZeneca announced last year that it was planning to spend US$100 million for R&D in China over a three-year period, most of which would go towards construction of a new lab.

There are many benefits to doing such work in China. Clinical trials are cheaper, drugs can be developed faster, and the local market is large and growing rapidly (projected to become the fifth largest for pharmaceuticals in three years' time).

Indeed, The Boston Consulting Group, in a report issued in 2002, stated that "the unmet need for sophisticated drugs is vast in China, and the potential payoff is significant."

It's a country where 100 to 150 million people carry the hepatitis-B virus, according to the report, and where neck and head cancers are more common than anywhere else in the world. Chinese also suffer from many of the same chronic conditions routinely treated in the West, including diabetes, high cholesterol, high blood pressure, arthritis, osteoporosis and depression. More and more, the central government is viewing AIDS as a serious problem as well.

It is also doing its share to spur drug discovery in China. Beijing is in the process of amending its new-drug review process to speed up approvals, and has invested heavily in university and research institute labs.

Facilities such as these, along with local start-ups and the multinationals' research centers are attracting large numbers of scientists from abroad. Most of these are Chinese citizens who have studied and worked overseas and have returned home. Shanghai alone is reported to have roughly 60,000 such scientists.

Sources: Chemical & Engineering News, March 12, 2007; BusinessWeek, August 7, 2006; Boston Consulting Group's 2002 report, "China's Growing Drug Market: Will You Be a Contender?"

(This article has also been posted on Helium.com.)