As 70% of Midici's brands are new to China, and after all the recent bad press, will consumers actually believe Medici's "100% guarantee on the origin of the packing listand customs declaration." We don't think so. And if all that is not enough, DaVinci just recently came out saying how they were blackmailed by the CCTV reporter for over $150,000. Here's a good NPR report on it.

Jinan Woman Learns That Online Crime Doesn't Pay

A Jinan woman was arrested for stealing branded clothing from department stores and selling them online via her Taobao shop. After questioning, police discovered the woman had committed over a hundred acts of shoplifting to stock her online store, with damages totaling an estimated RMB 200,000. Police responded to a call from a local Jinan adidas store reporting a theft of RMB 800 in stock. Police officers then discovered a photo on Taobao closely resembling the stolen merchandise, advertised as "genuine stock." They found that the store in question sold mostly brand-name clothing at half the retail price. Police then purchased an adidas item from the suspected store, and found a mall tag inside. Curiously, the seller's location was given as Qingdao, but the shipping documents showed a Jinan address. Police then tracked down the logistics company and identified the suspect's shipping address. Upon arresting the woman, police discovered over 400 pieces of stolen brand name clothing at her residence. The woman confessed that since 2009, she regularly visited large shopping malls to "stock" her Taobao store.

+CW Analysis:

We're surprised that more of this type of sticky finger activity is not reported. As an avid Taobao user we often wonder about the prices of some of the items and where they came from. Also, what were the Jinan police doing on Taobao? Regardless, kudos to the eagle-eyed police office who spotted the item which led to the arrest.

Better Life Having A Better Year

Better Life Commercial Chain Share Co., recently announced their 2012 expansion strategy, with a plan to open over 40 new hypermarket centers across county-level cities in Hunan. Better Life's Chairman, Wang Tian, stated that the company will focus on increasing county-level market share and introducing e-commerce into smaller towns. "During the Spring Festival spending season, do you know which stores had the best sales? Not Changsha, but the smaller cities such as Yongzhou, Chenzhou, Zhuzhou, Huarong, Yueyang, Shaoyang, and Changde," Wang said.

Better Life currently has stores in 90% of the county-level cities in Hunan province. However, this is clearly not enough, Wang emphasized. For 2012, Better Life has plans to open new centers in Zhangjiajie, Hengyang, Leiyang, and Yichun in Jiangxi Province, with a total retail size of over ​​250,000 sqm. In 2013, new centers will be opened in Chenzhou, Huaihua, and Ganzhou in Jiangxi province.

+CW Analysis:

You may not have heard of Better Life Commercial Chain Share Co., but you probably have one of their DVD players in your living room. Better Life, better known as Bubugao in Chinese, is synonymous with DVD players that will play anything you put in them.

Better Life is certainly doing well. Established in 2003, the group now has a dozen subsidiaries, over 100 supermarkets, and 17 department stores. In 2011, Better Life's hypermarket sales increased 10%, department store sales increased over 20%, and their home appliance sales have reached nearly RMB 1 billion, with group sales topping RMB 13 billion.

They've also recently announced a cooperation with President Chain Store Corporation, who operates over 4,800 7-Elevens in Taiwan, for a hypermarket joint venture in Sichuan. The Taiwanese have proven themselves adept at the end game. In Better Life's circle, just look at RT-Mart and Trustmart. RT-Mart is roaring along after their recently IPO, while Trustmart is two thirds the way of being fully acquired by Wal-Mart. We think this Sichuan venture is something the international players should definitely keep their eyes on.

Nemow - A Chinese Love Story

Nemow (南梦) is a women's leisure brand catering to office women 25-35 years old, which was started by Hu Hong Zhi (胡红智), a Sichuan native who wanted to build a brand with a flair for "neo-romanticism." The story behind Nemow is just that.

Hu graduated from China-West Medical University, and took a teaching position there where he met Ms. Wei, a TCM doctor six years his senior. After a short romance they married and left the university to volunteer together in Tibet. Two years later, the couple decided to move to Hainan where with RMB 150,000 investment from a classmate, they started the Nemow brand. The Hu's small fashion brand launched in 1992, and their business finally began to take off in 1999. Hu felt he needed a professional designer, so began interviewing candidates, and found a young, bright, and talented designer, whom he promptly fell in love. She was twelve years younger than Hu, and things soon got complicated.

Hu divorced his doctor wife/partner, and focused his attentions on his new designer girlfriend. The couple soon married, but Hu had to reconcile his growing business with his ex-wife, Ms. Wei, and his new wife, Ms. Wang. Hu resolved this by giving a 50% share of Nemow to his first wife, and launching another brand for his second wife. After a few years of multi-branding, Hu realized he needed Ms. Wang's help to support the Nemow brand. Hu was struck by her new designs, which introduced a younger, more colorful, European fashion sense to Nemow, which originally was designed by Ms. Wei, and targeting middle aged women. Customers responded well to the new youthful style, and sales were up, so Hu promoted Ms. Wang to head up the design department which was once led by Ms. Wei.

This complicated love triangle has seemingly turned out well for Hu. With it's romantic sensibility and a price point of around RMB 500, Nemow currently has grown to more than 200 stores across China with sales of approximately RMB 200 million annually.

Luxury sales boom in China, where giving gifts is an art

Here's the transcript:

We caught up with CLN advisor Corbett Wall to discuss retail location strategy in China for luxury brands. Corbett runs +CW Associates, a firm that advises brands on retail location strategy and other key issues related to running retail in China. Corbett spends much of his time travelling to second, third and fourth tier cities walking malls and talking with retail landlords and operators, and has countless stories of brand successes and failures in both first and lower tier markets.

Q: Given the competitive retail landscape and high operating costs in Shanghai and Beijing, do you recommend that luxury brands enter the market in the first tier cities, or should they just go straight to second tier cities?

A: Entering Beijing and Shanghai is really a branding and marketing decision. It is almost a given that brands will not make money on stores in Beijing and Shanghai. There are so few good retail locations in each market, and every luxury brand is lining up to get the same few spots. On top of that, rents are high and most consumers in Beijing and Shanghai are relatively spoiled for choice. It's really difficult to build brand loyalty in Shanghai and Beijing -- all the same people go to all the parties, but once your event is over, they don't really care anymore. However, from a branding standpoint, brands may feel that they need to be in Shanghai and Beijing.

More creative approaches to retail location for market entry are starting to take hold. We are seeing many luxury brands first locate in Hong Kong as their initial entry point to Mainland China, particularly given the difference in luxury taxes between Hong Kong and the Mainland.

I think luxury brands going straight to second tier markets for their entry to Mainland China is a great idea. If you were to go to a prominent retail location in a second tier city and tell them "I don't like Shanghai and Beijing. I would rather locate here first", they would love you and would give you an amazing location.

In general, it always takes much longer to open stores in China than expected. It typically takes at least a year to open a store, sometimes even longer if you are waiting for the perfect spot in Shanghai and Beijing. It may make sense to go to a second tier city first, demonstrate the performance of your store and then go back to Shanghai and Beijing to renegotiate with more leverage.

Q: Do brands that are part of a group (like a Richemont, LVMH, etc..) typically get better retail locations than stand alone brands?
A: Many of the brand groups retail location strategy is being driven by their Hong Kong offices, and they typically negotiate a block of retail space that they divide among their brands. This is both good and bad for them. Due to the large block of space and range of brands, groups have more negotiating leverage than a single brand would have. However, retail landlords will often bundle the best locations with the worst locations, so the brands with the biggest China business get great locations, and the ones that are newer to the market typically get saddled with the less than optimal locations.

Q: What is the biggest challenge for brands operating retail in second and third tier cities?

A: Next to retail location, service is the single biggest issue that retailers face in China, especially in second and third tier cities. There is no retail tradition in China and no veterans to train the young group of service professionals. Many brands are sending foreigners to train and run stores, but there are issues around language and local customs. The hardest thing to teach is the intangibles. Kentucky Fried Chicken has done the best job at training staff in China - they have set up Universities and invested heavily in training.

Retailers are paying high salaries for retail staff in second tier cities (often up to 8,000 to 10,000 RMB per month - on par with corporate staff in large cities), but just paying higher salaries doesn't necessarily translate to better service.

Q: What trends are you seeing for luxury brands running their own China operations versus working with a national distributor or partner to operate for them?

A: We are seeing many of the luxury brands taking their business back from distributors and opting to run it themselves. There are still a number of distributors running brands in the market though - ranging from large scale operators to smaller, more niche players. In general, we are seeing the distributors acting like venture capitalists - they pick ten brands to represent, knowing that only one may make it big. They are hedging their bets and taking a portfolio approach for the most part.

An issue for both self-run operations and distributor run is the choice of local franchise partners in second and third tier cities. Due to the high cost of product to fill a luxury store, the nature of most local partners is that they are "connected in complicated ways", so if you enter into an agreement with a partner that later turns sour, things can get very messy.

Q: Which luxury brands have the best retail location strategy?

A: Each of the brands is following a slightly different strategy, depending upon their customer base and brand positioning. Luis Vuitton for example has spread out very wide across China, and is in most tier 2 cities and a few tier 3 cities. Cartier, on the other hand, has gone to a smaller number of cities, but has gone deep into tier 3 and tier 4 cities. Many of the luxury brands are seeing a single store in a second or third tier city being their best performing store in the world.

In general, I tell brands to go where the money is, so long as you can handle it.

Corbett is part is CLN's Advisor network and is available to provide consultation to CLN members as part of CLN membership. He is also available for in depth projects and advisory.

HK New World Department Store Announces Yantai Store

Hong Kong New World Department Store recently announced an agreement with Xianglong Wanxiang Plaza in Yantai's Laishan District to open a 55,000 sqm department store and manage an additional 46,000 sqm of shopping mall. The 101,000 sqm project is expected to open in 2014, making it one of New World's largest to date. Total investment is estimated at $250 million. The entire Xianglong Wanxiang Plaza complex will be approximately 1.63 million sqm in size, with a retail area of 350,000 sqm, and a total investment of $1.28 billion.

+CW Analysis:

NWDS is really on a roll. Last year's revenues increased 46.8%. They now have 37 stores under the "New World" and "Ba Li Chun Tian" brands across 17 cities in China, a total GFA of 1.27 million sqm, zero debt, and $540 million in cash. If any mall owners out there are listening - department stores are killing it.

NWDS is smart and serious. They've quickly expanded from 1st and 2nd tier cities to where the action is - lower tier cities. They see what's happening in the LTCs and are making a move to increase market share by adding another 25 self-owned stores by 2016.

A quick revenue analysis shows some interesting things. NWDS tenant's gross sales are up 66.2%, and rental income is up 77.6%. So while the brands are really selling, NWDS is still making another 11% on top of that bump. This is most likely due to their deliberate rebranding and renovation activities. They've brought in newer brands, improved their F&B and entertainment offerings, and focused more attention on female services, all of which keep people in their stores longer. In store traffic is up 8% as a result.

On top of all this, what we find most impressive is what NWDS has done with their loyalty programs. VIP club members have grown 118%. NWDS now has 2.16 million VIP members. These members contributed to an astounding 46% of their sales.

So maybe NWDS is onto something, that the customer is king.

Five-Star Public Toilets For Karamay

The sanitation bureau of Karamay, Xinjiang recently announced that twelve 5-star mobile public toilets are being installed around the city, including Black Oil Hill, and in crowded downtown areas. The 5-star toilets come equipped with a mirror, coat hook, paper towels, ashtray, diaper changing area, exhaust fan, emergency button, and stainless steel sink and countertop. Soothing music will be played while the door is closed, and all lighting, exhaust, and flushing are automated.

According to Karamay sanitation bureau director Ms. Zhang Huixia, "People's happiness is not measured only by food, clothing, and shelter, but also convenience and a sense of dignity."

+CW Analysis:

First, we had to actually look this place up on the map. Sorry, but we haven't done any retail analysis here yet. From what we know, there are around 300k people, and a hill that oozes oil.

Second, we have to marvel at how the fiscal stimulus money from a few years ago has now trickled down to even the sanitation bureau of Karamay. The fact that there's any money left is remarkable let alone that it's being spent on toilets. As any informed corporate or socialist bureaucrat knows, you need to use it or lose it when it comes to your annual budget.

Third, "crowded downtown areas?"

Dongguan Gets Italian Luxury Mattresses

Italian mattress brand Dorelan recently entered the China market, selecting Dongguan for their first store. CEO Cristian Bergamaschi indicated the importance of the China market at a press conference held in the first floor lobby of Xinghe Furniture City.

+CW Analysis:

We had to giggle when we heard this because selling mattresses in a city with the highest concentration of brothels in China is kind of funny. Selling luxury mattresses is even funnier because we have to assume there is also a huge ernai population in Dongguan requiring that suitors provide the best mattresses money can buy for their mistresses.

Entering China is a complicated affair. A brand needs to decide on the right city, the right partners, and fully understand the local market in order to be successful. Many foreign brand entry stories begin in Shanghai or Beijing and result in an unhappy ending. In this particular China entry case, we think Dorelan has chosen the perfect market - a city that appreciates a good mattress, with the high probability of a happy ending.

Water Water Everywhere

Legend Holdings Group, along with three major real estate developers, Dalian Wanda, China Asia Standard, and Dalian Yifang, have announced that they will jointly invest RMB 11 billion ($1.7 billion) into China's largest high-end mineral water project. The project will be located in the Changbai mountain region of Jilin province bordering North Korea. The investment is expected to generate over 10 million tons of high quality mineral water per year by the time the project is completed in 2020.

+CW Analysis:

This is an interesting deal. First of all, Legend is the mother company of Lenovo. Their chairman, Liu Chuanzhi, has already said he wants to make investments into food and agriculture, and they've already ventured into liquor distilling in Hunan and Hebei. Imagine Apple coming out and saying they're launching iWater.

If you don't know who Liu is, now's the time. There's been all this talk about the next Steve Jobs coming from China. Liu already owns that story. In 1984, with a RMB200,000 ($31,000) loan, Liu started Legend out of a one room office in Beijing, and turned it into the second largest PC manufacturer in the world. That's pretty cool for a guy who doesn't wear black turtlenecks, but does probably dye his hair black.

Then there's the other guys, or should I say other really rich guys? Wanda's chairman Wang Jianlin last year gave away RMB1.28 billion ($200 million). Asia Standard Group's chairman Lu Zhiqiang is worth an estimated RMB 16 billion ($2.5 billion), and Yifang's Sun Xishuang rounds out the gang with RMB 3.7 billion ($585 million).
This sounds like it's going to be some expensive water. What happened to the glorious days when comrades just carried around an old Nestle coffee jar filled with boiled tap water?

How's this for a killer sales pitch? "Around 70 percent of the rivers have been polluted. And the pollution isn't getting any better. Water sources that haven't been contaminated are very scarce, which are usually located in remote areas," says Liao Lei, the secretary-general of the natural mineral water committee.

Yes, the people need Changbai Mountain Spring Water! But let's look at this a little closer. These investors, three of them major real estate players, are going to set up China's largest mineral water project in an area that already has seven brands selling Changbai Mountain Spring Water: Quanyangquan, Nongfu Spring, Kangshifu, Xinglongquan, Jiyuan, Tianchishui, and Sanjiang Changbaishan.

Will Wanda water taste better?

Keep in mind that a plain old bottle of water costs about RMB 1.50 on the streets of Shanghai while a premium bottled water can cost upwards of RMB 60 in a restaurant.

Sounds like they'll need to create some serious brand image in order to get that luxury margin.

So why are four really rich guys jumping into the water all at once? Well, this past June the high-end mineral water company Tibet 5100 raised $170 million in their HK IPO. That will make you thirsty. Tibet 5100's profits are also up 232% YoY, selling 28,000 tons of water the first half of this year. With growth like this, establishing a brand and building some market share before it's too late sounds like a good idea, especially with companies like Kunlun Mountain Spring Water and Aershan Mineral Water from Inner Mongolia also entering the market.

Currently, the majority of the China premium bottled water market (defined by Euromonitor as having a retail price higher than RMB 5 per 500ml bottle) is still held by Western companies. As of 2010, Groupe Danone, who sells Evian, Volvic, and Badoit, led the market with a 26.9% share, and Nestle S.A., who sells Perrier, San Pelligrino, Vittel, Acqua Panna, and Contrex had a 4.9% share. Tibet 5100 states in their prospectus that they are the market leaders with a 28.5% share, but when you look closely at the fine print you learn that "Sales volume in 2008, 2009 and 2010 includes volume provided to CRE, its largest customer, for free under a buy-one-get-one-free arrangement entered into in 2008. CRE is a logistics company and an enterprise subordinate to and acting as a procurement agent on behalf of the Ministry of Railways (MOR) in purchasing bottled mineral water from Tibet 5100 Spring. The volume of bottled water provided for free to CRE is in turn distributed by CRE to train operators under the MOR, who serve the bottled water to ticketed passengers on high-speed trains, inter-provincial CRH trains and certain other CRH trains. The volume of bottled water delivered to CRE accounted for approximately 90.9%, 89.7% and 89.5% of Tibet 5100 Spring's sales volume in 2008, 2009 and 2010."

Still, regardless of how much water Tibet 5100 actually gave away (89.5%), or how quickly the premium bottled water market has grown since 2005 (21.2%), or what percentage this segment accounts for of the total retail value of the bottled water market (45.3%) - this still sounds like a real estate play. Why?

Back in 2009, a consortium which included the Dalian Wanda, China Asia Standard, and Dalian Yifang agreed to build China's largest tourist investment project, a ski resort in, you guessed it, the Changbai mountains. With an investment of RMB 20 billion, the Changbai International Tourist Resort will have 43 ski runs covering an area of 30 square kilometers, making it the largest ski resort in Asia.

Women Hold Up Half The Sky Except After Divorce

The first lawsuit following the implementation of China's new Marriage Law was announced in Shijiazhuang, Hebei. The new marriage law has changed the way property disputes are handled after a divorce. A disgruntled Mrs. Sun handed a petition to the court asking for a divorce from her estranged husband. Mrs. Sun asked that the court split 50% ownership of their house between them. However, according to the judicial interpretation of the new marriage law announced in August, their house was purchased before the marriage and paid for by their parents, therefore Mrs. Sun is not entitled to any ownership claim on the property.

+CW Analysis:

It's fairly common practice in Chinese marriages that the groom's family provide a house for the bride, and the bride's family buys the home appliances or a car. This gets the newlyweds started with their life. The husband works and the wife raises the family and takes care of the home. The house typically belongs to both of them. If things go south, the wife still has part of the house as leverage.

Now, with the new interpretation of China's marriage laws, a house purchased by parents and registered under their child's name remains the personal property of the child (traditionally the groom) after the child gets married. A house purchased by a mortgage prior to marriage, is considered the personal property of the registered owner, rather than the joint estate of the couple.

This means that after a divorce, the wife, typically not the breadwinner, and therefore typically not the registered owner, has zero rights to the house. Think of the chaos this will create. Property offices across China are filled with wives demanding that they be added to the deed, families are bickering over ownership, and brides are upping the ante for their jump into domestication by demanding cash up front.

We thought that under socialism everyone got a place to live. This new marriage law sure turns that concept upside down.

Brand

I'Happy Celebrates Opening Of 1000th Store

Leisure fashion brand I'Happy (海贝服饰) recently invited Taiwanese singer Wu Pei Ci to commemorate the opening of their 1000th store in Zhengzhou.

I'Happy focuses mainly on female fashion, combining Korean styling with young office chic. Price points range from RMB 150 - 400 and customers are typically in their twenties. The brand has also recently launched a stylish children's line. I'Happy encourages customers to bring home an "extraordinary quality of life, fashion, love, and happiness" with every purchase.

I'Happy is the brainchild of Fang Le Ming, a serial entrepreneur with humble beginnings. Fang comes from a small village in Jiangxi, one of China's poorest provinces, and was orphaned at the age of eight. Attending university wasn't an option for Fang who nonetheless has started two successful businesses - I'Happy, and a high-tech integrated circuit design company called Chipjet which develops and manufactures chips for printers.

+CW Analysis:

This is just another example of the amazing initiative you see in so many Chinese entrepreneurs. It's also a huge wake up call for any brand entering China. Most likely you've never heard of I'Happy, yet they have 1000 shops throughout China. Most likely you don't know who Wu Pei Ci is either (she's not that great of a singer), but she is quite popular. So here's a brand you haven't heard of flying a singer you haven't heard of to a place you haven't heard of. Sounds a bit like that philosophical tree in the forest, but in China there's no time to sit around and think about it.

How is a new Western brand going to compete in a market where there are so many brands already out there? Think about how few Western fashion brands have 1000 stores in China, who they are, how long it took, and what it cost. Then think again about Fang Le Ming and his achievement. As always we're blown away when we look at the scope and size of the China retail market - and all the things we don't know.

China's Wal-Mart sanctions: A trend against foreign firms?

From the October 2011 issue of Shopping Centers Today

By Curt Hazlett

Foreigners in Beijing often turn to the Internet for practical answers to that city's mysteries, such as where to find the best bars and nightlife, or which malls offer the most bang for the yuan. Sometimes, though, their questions are rhetorical. As one newcomer wrote on a local blog in rather fractured prose, using slang for the Chinese capital: I just arrived to bj and I'm curious. Why beijing malls are empty? A few of shopper!

This is a question that could be asked of malls all over China, and India too, for that matter. These two powerhouses of retail development -- where shopping centers have sprung up like cabbages over the past decade -- have seen some reversal of fortune. Many of their shiny new luxury malls are devoid of both shoppers and tenants -- sometimes remarkably so.

In New Delhi six malls opened in the first quarter of this year. Five of them were nearly empty, with occupancy rates of only 7 to 10 percent, according to Jones Lang LaSalle Meghraj. Nationwide, some 17.3 million square feet of mall space opened in 2010, but only 9.3 million square feet of that would wind up leased, according to a Jones Lang LaSalle Meghraj estimate. So bad is the leasing environment that the two-year-old Mallum Mall, in Mumbai, was demolished in June to make way for a residential and office project. The small center's owners had failed to find a single tenant.

"As of now there are close to 225 shopping centers existing across the country," said Amanpreet Singh Banga, manager of retail agency for the Knight Frank India brokerage, in Delhi. "There are just a dozen or 15 which are actually surviving well."

In China stories abound of luxury malls being built in a frenzy, only to open to an indifferent public. At 6 million square feet, the Golden Resources Mall was the world's largest when it opened seven years ago in a Beijing suburb, and yet it has never drawn more than a trickle of shoppers. Still, it has performed better than the New South China Mall, in Dongguan, which succeeded Golden Resources as the world's largest mall in 2005. Designed for 2,350 tenants, New South China Mall now has about a dozen.

"There are empty malls all over China," said Vernon Martin, the principal of American Property Research, a Los Angeles appraisal firm with clients in the U.S. and Asia. "We are dealing with a country whose median income is about 10 percent of the United States. But the developers give them malls full of Sephora cosmetics stores. It doesn't seem rational."

To be fair, successful malls can be found. Sophisticated developers like Singapore's CapitaLand and New Delhi's DLF Group have done well through their careful planning and sound management. But many less-experienced companies have lost uncounted millions. Following we present just a few of the more common problems -- the seven deadly sins, as it were, of emerging-market development.

Overconfidence: How hard could developing be?

There is no lack of self-esteem in China and India. The economic rise of those two countries generated a wave of entrepreneurialism that brought riches to those with the best ideas and the most pluck. And once someone has built a fortune in fast foods or the import-export business, how hard could it be to build a shopping center?

"I recently had a discussion with a potential developer who made a fortune importing lumber," said Corbett Wall, head of CW Associates, a Shanghai firm that works with developers and retailers to expand in China. That entrepreneur had in mind to build a mall, Wall recalls. "More than likely that mall would be a disaster," he said. "His company is a group of people who have never done this before and have no idea what they are doing. You have a lot of those projects -- the independent developer who is convinced that Louis Vuitton and Cartier will come to their mall."

In India excessively confident developers have given short shrift to the desires of both consumers and tenants, says Banga. "This country is new to organized retail," Banga said. "Mom-and-pop is the predominant factor, and these developers don't understand that. They treat shopping centers as they would commercial or residential projects. They are not."

Overbuilding: Bigger is not always better

Life in China and India takes place on a grand scale. Why should their shopping centers not be grand too? In China, where the government owns all the land, those companies granted permission to build have often been so eager to maximize space -- and hence profits -- that they have lost sight of their markets, says Richard Poulos, a partner and executive vice president of The Jerde Partnership, a Los Angeles-based architecture firm with extensive Asian experience. When the government approves a project, it determines the maximum floor space that can be built, Poulos says.

"Say you can build a building with six times the land area," said Poulos. "By the time you get done with setbacks and open areas, it might be something like 3 million square feet. The Chinese say, 'We've been given that FAR [floor area ratio], so we can build that.' But we say that's not market research, it's maximizing what you can build. It creates the problem of building way too much. You can't get the tenants."

Government involvement is one of the differences between developing in China and India, says Poulos. "In China, if the government decides to do something, it just goes and does it. In India ... they struggle with going and doing it."

And yet such relative inefficiency has not prevented overbuilding in India. Jones Lang LaSalle notes that over the past decade, Indian retail development expanded from first-tier cities, such as Mumbai and Delhi, to second-tier ones, such as Bangalore, Calcutta, Hyderabad and Pune -- each of which saw the completion of between seven and 10 malls by the end of 2007. Retail development since then has been marked by "considerable rightsizing," according to Jones Lang LaSalle, but the building boom has not gone bust. The firm predicted last year that 37 million square feet of retail space would be added in India's top seven markets between the fourth quarter of 2010 and the end of 2012.

Getting bad advice -- or none at all

Unfettered expansion raises a question: Why does market analysis not dissuade developers from risky projects? "What 'market analysis'? " quipped Wall. Many of China's inexperienced developers shunned outside expertise during the hottest years of the boom, he says. "When the economy is on fire, people aren't going around trying to measure things," Wall said. "When people have made a lot of money, it is incomprehensible to them that they aren't going to make more money." Moreover, he adds, "this is a discount culture. They would have to pay for it. Services are very low on the totem pole, and nobody wants to admit they don't know something. Nobody wants to hear that their grand idea isn't going to work."

Even when consultants are hired, their advice is not always sound. The developer of the New South China Mall, who made his fortune in the instant-noodle business, engaged a Chinese research firm to analyze the market in Dongguan, an industrial city. "I read the feasibility study," said appraiser Martin, who also visited the mall. "Their attitude was that if you built the biggest mall in Dongguan, people would come. They completely overestimated the trade area, thinking that everyone would drive to it. There was no consideration of spending power. It didn't make sense."

Trading quality for speed

As is often the case in booming economies, mall developers in China and India learned quickly that moving fast meant bigger profits. In China two things are driving that hurry-up-and-get-it-done attitude, Poulos says. "First, they are impatient entrepreneurs and they want to get it finished," he said. "The other is that the government wants things done as well. It has anti-speculation policies in place. It doesn't want people holding onto land. So there is a very tight time frame before they pull the land back. That hurry-up mode causes mistakes to be made."

Wall notes that many Chinese developers have no experience in the business and neither have they any desire to stay in it. He describes their attitude as: "We'll do the best we can and then get out of it." Such malls usually are sold off in pieces to local retailers with the result that the property is in effect unmanaged. "Who is going to manage something they can't collect fees from?" he asked. "You have this mall that no one takes care of or manages, and eventually it deteriorates and becomes a ghost mall."

The desire for quick profits has hurt Indian malls as well, says Banga. "Many developers will capitalize the value of a center by selling it," he said. When that happens, "you have practically lost management control over the shopping center. It is a big, big reason for failure."

Indeed, the pressure to reap profits was so great that until recently almost 95 percent of India's malls had multiple owners, sometimes hundreds of them, Anshuman Magazine, chairman of CB Richard Ellis South Asia, told the Indian business press. "If a mall doesn't have single ownership, it loses direction," he said.

Leasing left for last

Given the haste with which many properties have been developed, it may come as little surprise that the hard work of finding quality retail tenants has often been put off until the end, with disastrous results. Many Chinese developers did not even think about tenants at the start, says Poulos, who has had long experience in China. "You'd ask how leasing was going and they'd say, 'What do you mean leasing?' The feeling was, build and they will come."

Banga echoes that. If an Indian mall is 60 or 70 percent leased, its operator is very happy, he says. "That's the reality," Banga said. "The lesson is that pre-leasing has to be done before the project goes up."

Lack of a strategy

Retail development has a steep learning curve, and developers in China and India are quickly discovering what works and what does not. In current Chinese centers "we are now seeing much more sophistication," said Poulos, but early malls "were just stacked up like a bunch of donuts, and the merchandizing was random. Wherever someone wanted to go, they just put them there." Many of them lacked any tenant or merchandising strategy, "meaning that there isn't a road map of the types of tenants that should go where within the project."

Wall, who has spent much of his life in Asia and has lived in China for 20 years, says the retail concept most familiar to the Chinese is the department store. "We know that department stores and malls are completely different animals," he said. But in China the department store model has been widely applied to malls. "The merchandise is all crammed in -- that's the mentality. There is really no merchandising. The people who used to run department stores are the people they are hiring to run malls. You can't find an experienced mall manager. The ones who have experience are imported from Hong Kong or Taiwan."

Location, location, dislocation

It should go without saying that the key to successful retail, whether in a developing market or an established one, is to be in the right place to serve a chosen market. A center's tenant lineup needs to mesh with consumers' needs and spending ability, and shoppers need to be able to get to the center with a minimum of hassle.

Yet industry observers say poor location is among the biggest reasons for the rash of failed malls in China and India. A good example is New South China Mall, which is connected to neither train nor subway lines and is in a pedestrian-unfriendly neighborhood, according to Martin. "The successful Chinese retail districts are near train stations," he said.

Said Wall: "There are malls that are very well built but in the wrong place. They got the opportunity to build a mall, they got a good architect, it's beautiful -- but it's in the wrong place." One such is Beijing's massive Golden Resources Mall, built in a difficult-to-reach area of the city. How difficult? As one blogger advised a prospective visitor traveling from the city's main rail station:

Take subway line 2 to Xizhimen station, then transfer to subway line 4 to Renming Daxue (Peoples University). Walk about 200 meters to Sitongqiaoxizhan, take bus 365 or 355 to Yuandaludong and walk about 300 meters to Golden Resources Mall.

Such inconvenience has registered in the mall's results.

There are, of course, many other reasons malls can falter, ranging from ineffective design to poor management, and newcomers can be expected to make such mistakes. But those who have worked with developers in both China and India make it clear that this emerging wave of developers is learning quickly.

Indian developers have embarked on a more cautious course, says Banga, and new projects "are being delivered on a global standard. They are much better in terms of location, design and accessibility." Among these are Select City Walk, in New Delhi, and Inorbit Mall, in Mumbai.

And in China, savvy developers are catching on to the interconnected nature of the retail business. "There are groups here now that understand that retailing is an ecosystem," said Wall. "At the end of the day, the tenants you have and the mix of those tenants determine what type of people comes in and spend money. They are starting to get that."

Said Poulos: "The Chinese are really smart. They are watching things and learning quickly."

Move Over Phantom, Chairman Mao Hits The Stage

Chairman Mao's hometown in Hunan province recently announced plans that they will invest RMB 500 million into a world class theater production entitled "China Has Mao Zedong."

The city of Xiangtan plans to promote "red revolution tourism" by depicting the thirty some years of history from 1921, when the Communist Party of China was founded, to 1949, when the New China was established. The production will be held in the Shaoshan Mountain scenic area in cooperation with three companies jointly investing 500 million into the project - the first stage of a bid to build a new town with cultural and historic sites and destinations.

Xiangtan Radio and Television Secretary, Xiong Xing Bao, said that Hollywood film director James Cameron of Titanic and Avatar fame, along with a number of famous Chinese directors will be invited to contribute to the show. The city though is still trying to reach Cameron, and just last month posted a request on weibo.com asking for his contact information.

+CW Analysis:

A bit of a ripple effect going on here with this red revolution theme. There was some global press a few months ago when Bo Xilai had residents in Chongqing gather and sing revolutionary songs. TV and radio broadcast the songs, newspapers printed the lyrics, and people gathered in large groups to sing songs such as Love of the Red Flag and Good Men Should Become Soldiers.

With Mao meets Avatar, it might be a bandwagon effect, but we think that whatever happens, whether Cameron is ever contacted via weibo, whether the show is ever produced, whether 500 million is ever invested, in the end, somehow, this will most likely be a real estate play. Property in Changsha and neighboring Xiangtan is booming, and with the new high speed rail line now linking Guangzhou to Changsha/Xiangtan in a little over two hours, people from Guangzhou can enjoy a nice weekend in a town filled with spicy food, raucous night life, and continue the party in a spacious villa purchased for about RMB 12,000 psm. Oh yes, and catch a showing of Mao meets Avatar too.

But back to Bo. We think Bo is the main character here. He's the brand maker. He certainly understands positioning and how to get his brand message across.

Take this quote for example from a Beijing political analyst Russell Leigh Moses: "Bo's campaign is multidimensional, but its primary objective seems to be trying to redefine local affairs as mass politics. [It] is not about policy as much as it is about a new communist theology that is nostalgic and not like anyone else's."

Replace "affairs" with "style", "politics" with "media", and "policy" with "fashion" and you have a well crafted branding statement that could have been written by any top ad agency for any global fashion brand.

Pass The Popcorn In Linyi

Six-hundred seat Dongfanghong Theater is the only place to watch a movie in Linyi, a southern Shandong town of approximately 1.8 million people. But that's all about to change. Following Linyi's fast paced development, five national theater chains are now under construction. A year from now moviegoers will have more than thirty screens to choose from.

Poly International Studios, Happiness Blue Ocean Studios, Wanda International Cinema, Jinyi Cinema, and Xingmei Theater are all 5-star theaters bringing a new movie going experience to Linyi's audiences.

With movie tickets costing RMB 50-60, many people choose to watch on Tuesdays - 50% discount night. Still, theater revenues have exceeded RMB 1 million.

+CW Analysis:

If you haven't been to the movies recently, you're in for a surprise. The China movie theater business is on fire. China currently has approximately 1,800 cinemas with about 6,200 screens. Compare that to the North American market, which has around 5,400 cinemas with 39,000 screens. Think 100+ new multiplexes being built each year. That equates to 10,000 screens in five years and 15,000 screens in ten years. Every new mall we visit seems to have a movie theater anchor on the top floor.

There's plenty of room for growth here as well which is why cities such as Linyi are building five new theaters. It's not that one billion Chinese suddenly decided to go see a movie, it's more about giving people new options to spend their extra pocket money. If you've got RMB 100 in your pocket and you're on a date in Linyi - where do you go?

This amazing growth has turned the heads of movie executives everywhere. Last year's box office in China grew by 61% making it the third-largest box-office market in the world, behind Japan and the U.S. In dollars that a cool $1.5 billion. These numbers are impressive, but for Hollywood there's still a strict quota on foreign movies. Chinese theaters are required to devote two-thirds of screen time to domestic films, and only 20 foreign films a year can share in domestic box office. Of this, the foreign studios receive about 15% of gross receipts. So even though the market is booming, Hollywood isn't cashing in just yet.

Aokang Shoes Planning IPO to Not Make Shoes

The China Securities Regulatory Commission is examining Aokang Shoes recent IPO application. Aokang, based in Wenzhou, and one of China's largest shoe manufacturers, plans to use the IPO proceeds to purchase prime retail locations in major cities throughout China. According to their analysts, investing in real estate will produce higher returns than investing in the brand.

Aokang is a major leather shoes producer and retailer in China with three production bases, two research centers and over 3,000 retail stores. The brand is estimated to be worth RMB 8 billion.

The IPO issuance is for 81 million new shares, increasing Aokang's total outstanding shares to 401 million.

+CW Analysis:

Looking through the Aokang prospectus, it outlines that Aokang plans to invest RMB 870 million for property. This includes 12 new flagship stores, 38 concept stores, 120 stand alone stores, and 180 shop-in-shops. RMB 96 million will be invested in IT upgrades, and RMB 50 million will go into R&D.

This is a bit like Nike issuing a statement that says, "Dear Investors, We don't really believe in the value of our brand, but we know that if we buy a lot of property, we will make more money."

Let's look at the boardroom logic behind this.

As of the end of 2010, Aokang had a total of 3869 retail shoe shops, with about 10% directly operated, the rest being franchisees. Although two thirds of their revenue comes from the franchisees, the average income of their directly operated stores was RMB 1.2 million per store. With a gross margin of 44%, the average direct store has a profit of RMB 530,000. Franchises on the other hand bring a gross margin of 32%, with an average profit of RMB132,000 per store. Since self operated stores obviously make more money, why not invest in more self operated stores?

So Aokang's thinking goes like this: "Dear Investors, We will focus our resources on the 10% of our sales network that makes up 30% of our revenue, and forget about the 90% that makes all the rest."

U.S. brands open 2nd phase in China expansion

Zhengzhou Gets Their Caffeine Fix

Starbucks joins the likes of other international retailers such as ZARA, H&M, Uniqlo, C&A, and Muji, with their first store opening at the Zhengzhou 360 Mall scheduled for October. The coffee chain has announced plans to open five more stores in the near future.

+CW Analysis:

It's well known that walking around carrying a paper cup with a round green logo on it is a status symbol for upwardly mobile Chinese in cities like Shanghai and Beijing. Besides being a go-to meeting place, a check out scene, a sleeping area, and a clean bathroom, Starbucks has successfully introduced the Western social habit of waiting in line to order an expensive coffee then sitting around staring at your notebook while watching other people sit around staring at their notebooks.

Starbucks is not the first mover in Zhengzhou. Established chains such as Dio, SBC, and Jin Di as well as several independents have already established a cafe culture. Starbucks enters a lower tier market once there's some existing traction, and ups the game with nicer design, proven SOPs, quality assurance, and working air condition. For this you pay the equivalent of five Chinese breakfasts for a cup of coffee. Is the strategy viable? Yes it is, as long as they maintain strong recruiting and training practices. In most lower tier retail centers, Starbucks is often an anchor tenant. Getting a Starbucks into your center lifts your rent roll a notch or two. It's good for Starbucks, it's good for the center. As long as this relationship continues, Starbucks can continue to roll out the mermaid logo, their signature lattes, and those clean toilets.

What is interesting to note is that tea is slowly taking up more space on the menu. Is this a new strategy to widen the Starbucks offering, or a realization that Chinese are already used to paying for expensive tea?

Prada Opens First Zhejiang Store In Wenzhou

Prada's 14th China flagship store will soon open in Wenzhou's Fortune Shopping Center next to Gucci, Burberry, Cartier, and Zegna. Discriminating shoppers will be treated to a special offering of ten limited edition Prada bags and a RMB 270,000 alligator purse.

+CW Analysis:

But of course. Where else in China would a RMB 270,000 alligator purse actually be sold? Here's a video of a wedding party motorcade in Wenzhou to drive the point home. 10 Bentleys, 8 Rolls Royces, 4 Lamborghinis, and 4 Ferraris. Someone at that wedding needs that purse!

Taiyuan Airport Hits A Record Two Hundred Daily Flights

Taiyuan International Airport reports they have reached a record two hundred flights in one day. On August 10th, 10,934 flyers recently came in and out of Taiyuan, the largest city in Shanxi province with about 4 million residents. Taiyuan serves twenty plus destinations across China and recently celebrated their first international flight - to Incheon, South Korea in May. They are now truly an international airport.

+CW Analysis:

Taiyuan supplies half of China's coal. That's a lot of coal. Last year China consumed about 3.2 billion metric tons of coal. Selling for around $130 per ton, Taiyuan produced the equivalent street value of over US$200 billion in coal.

These figures indicate that rich coal miner's daughter will still have their choice of LV, Coach, or Burberry bags, and dad can pick up a couple Swiss watches with names that even Westerners can't pronounce correctly. The glow in the dark model might be particularly useful since pollution is so bad in Taiyuan you can't tell what time it is.

So what exactly does 200 flights a day mean? For Brits, think Newcastle International over Christmas. For Americans, an average day at Indianapolis International Airport. Neither of these cities can possibly compare to the spending power of a "little" coal mining town in northern China with only four million people. Here are a few other cities you don't hear that much about with the same air traffic as Taiyuan - Hohhot, Fuzhou, Guiyang, and Zhengzhou. Guess which one doesn't have LV yet? Hint: It's the one with "expensive" in it's name.

Brand Of The Month

BBLLUUEE 粉蓝

BBLLUUEE is a local Chinese brand started by former Changsha area VJ and piano teacher, Lee Fei Yue. Lee knew early in his career that he wanted to be involved in fashion, and at thirty-five, with just four years apparel experience, he launched BBLLUUEE, targeting fashion conscious city ladies aged 25-35. In six short years BBLLUUEE has now grown to 560 employees and has over 300 shops across 20 provinces. Lee is BBLLUUEE's general manager as well as chief designer, and has developed his own aesthetic and brand style combining leisure and office wear by blending feminine elements, soft lines, and simple styling. Price points range from RMB400 - 1200 for the Spring/Summer collection, and up to RMB1800 for the Autumn/Winter collection.

Imagine the work involved in copying an entire IKEA store - the furniture, the layout, the colors, even the blue and yellow bags and little pencils! That's exactly what 11 Furniture (十一家具) has done in Kunming.

Will IKEA cry foul, spend a few years in court to maybe get $20,000 in settlement, or will they figure out a way to get a store open there fast and hire over all the employees?

What would you do? What can you do?

Source: Reuters

- you got to do your homework
- you can't know what's really happening so don't assume you do
- beware of people who say they have friends in high places
- don't trust the numbers

I think these are fairly common sense rules for doing business anywhere, right? Well, you'd be surprised.

Today I'm reading a great article in SFGate titled, "China shell firms take Wall Street for a ride" which is a textbook case study in all of the above.

After raising upwards of $125 million through a back door listing, the question comes up, "Hey, where's all the money?" The punchline quote from the Chairman's wife is "What I can tell you is that our company is doing well and the operation has been very normal."

What she should've said was, "I still can't believe you guys were dumb enough to actually give us $125 million in the first place."


China shell firms take Wall Street for a ride
Azam Ahmed, David Barboza, New York Times
Sunday, July 31, 2011

Dalian, China

It was the hot new thing on Wall Street - one of those exotic investments that seem to promise untold riches for the lucky few.

And, like so many hot new things, it went cold fast.

Such was the fabulous stock-market flameout of a company called Rino International, an untested enterprise that, until recently, would have raised nary an eyebrow in the United States.

But over the past few years, Rino International and scores of other young Chinese companies slipped into the U.S. stock market through the back door. Rino's U.S. stockholders later lost hundreds of millions of dollars when accusations surfaced that the company had fudged its books. All told, investors' losses on these Chinese ventures have stretched into the billions.

How companies like Rino wormed their way into the temples of U.S. capitalism is a story for these financial times. Even amid the wreckage of the 2007 to 2008 financial collapse, an ecosystem of Wall Street enablers - bankers, lawyers, entrepreneurs, auditors - spirited Chinese companies to the United States. With some deft financial maneuvers, these businesses essentially went public while sidestepping the usual rules. Before long, many were trading on the Nasdaq stock market, alongside the likes of Google.

It was all perfectly legal. With bankers' help, the Chinese companies executed what are known as reverse mergers. They bought U.S. companies that were merely shells and assumed those companies' stock tickers - sort of the Wall Street equivalent of "Invasion of the Body Snatchers." The strategy let them avoid reviews with state and federal regulators that are normally required for initial public stock offerings.

At issue now is who should bear responsibility for the bursting of yet another Wall Street bubble. Should it be the Chinese executives and their bankers, who engineered the deals and celebrated these companies? Or should it be the investors, who bought these stocks when, in hindsight, the risks seemed clear enough? The lawsuits are flying.

Next to Bernard Madoff and the sins of the subprime era, the supposed shenanigans of a few Chinese companies might seem like small beer. But the developments underscore fundamental questions that came to the fore in the financial crisis: What do the people who create and sell investments owe to those who buy the investments? And where, if anywhere, are the regulators?

Dozens of Chinese companies that, like Rino, entered the U.S. market via reverse mergers have since been accused of fraud or shoddy accounting. The shares of at least 19 of them have been suspended or delisted by Nasdaq, wiping out billions of dollars in stock market value. Shares of Rino, which were flying high at $35 in 2009, have been removed from the exchange.

Laurence M. Rosen, whose law firm has filed a class-action suit against Rino International, says Rino's bankers failed investors. Wall Street didn't do its homework, he says.

"This is egregious," Rosen says. "They said they did due diligence but were fooled - but they weren't doing any solid due diligence."

Rino has been accused of creating phony business contracts and wildly inflating its sales, among other things. Executives at Rino International, which is based here in Dalian and makes industrial pollution control systems, declined to comment, beyond saying that it is conducting business as usual.

There is not much to see outside the headquarters of Rino International. The company resides in a bland corporate park that is home to a number of other Chinese businesses. A guard stands watch at the gated entrance. Inside, workers load steel beams onto trucks. The bang and hum of factory work rises from workshops.

Dalian, a seaport city in northeastern China with a population of about 6 million, in recent years has developed into a fast-growing hub of machine manufacturing, petrochemicals, oil refining and electronics. Driving this growth have been companies like Rino, whose name means "green promise" in Chinese.

For international investors, Rino was an alluring equation: "China" plus "environment" equals profit. Like many other Chinese companies, Rino faced obstacles in borrowing money from the state-owned banks that dominate the country's economic life. It also confronted hurdles in going public on stock markets in Shanghai or Shenzhen, where share prices have gyrated wildly.

And so the entrepreneurs behind Rino - Zou Dejun and his wife, Qiu Jianping - turned to Wall Street.

The matchmaker in this transcontinental deal was an American, Chris Bickel, who earned handsome finder's fees for bringing Chinese companies to the attention of investment bankers and lawyers back in New York. Working from China with a small New York financial advisory firm, Douglas Financial, Bickel helped package Rino International for its Wall Street debut.

"We determined at the time that this was a significant market and they had the technology," Bickel recalls, adding that any possible improprieties arose later.

As part of the plan, Rino got new handlers in New York: a law firm, an investor relations firm, a new auditor. To complete the package, the company named as its chief financial officer Bruce Richardson, a U.S. businessman who had spent more than a decade in Shanghai. Richardson declined to comment.

To gain entry to a U.S. stock market without an IPO, Rino needed to find a U.S. shell. Enter Glenn A. Little, a Texas entrepreneur who specialized in buying defunct companies and selling them in reverse mergers.

In 2002, Little paid about $100,000 to buy Jade Mountain, a failed medical devices company that had once been publicly traded. Jade Mountain, based in Nevada, had no business operations, no debt, no liabilities. What it had was a current stock registration.

Little himself was so enamored with Rino that rather than take payment in cash, he asked for shares in Rino. The bankers' pitch seemed irresistible, he recalls, all the more because several big institutions, including Bank of America, were investing in Rino, too.

"They gave me a book and it had the two most exciting words you could hear: 'China' and 'pollution,' " Little says. "They had audited financials, big-name lawyers and Bank of America."

In October 2007, soon after Rino acquired Jade Mountain, Bank of America and about a dozen other investors, including Alder Capital, a hedge fund, bought Rino shares in what is known as a private placement. That sale raised $25 million. Before long, Rino stock was trading on the over-the-counter market for about $4.50 a share.

Over the next several years, Rino reported ever-higher quarterly profits. It expanded its business and its product line. Word spread on Wall Street: Rino was a company to watch.

David N. Feldman, a New York lawyer and the author of "Reverse Mergers and Other Alternatives to Traditional IPOs," says that such reverse mergers reflected a confluence of two powerful forces. One the one hand, Chinese companies were desperate to raise capital. On the other, U.S. investors were desperate to tap into China's fast-growing economy. "A lot of this is about access to capital," Feldman says.

Alan Greenspan and Diana Ross were headliners at a September 2009 investment conference held by an investment bank that is little known outside financial circles: Rodman & Renshaw.

Founded in 2002, Rodman has carved a niche for itself as the Goldman Sachs of private placements - sales of new stocks or bonds that circumvent the public markets. The hurdles for these private sales are lower than for public offerings, the theory being that the buyers - large, supposedly sophisticated investors - can do their own homework.

Like many investors, Rodman smelled opportunity in China, and in 2009, when Rino wanted to raise more money in the United States, the bank gave the Chinese company a prominent place at its gala. The presentation served as Rino's splashy debut before thousands of investors.

A few months later, Rodman helped Rino raise $100 million in a deal that valued the Chinese company at nearly $1 billion. From there, however, Rino's stock price began to decline. In November 2010, it fell off a cliff.

That month, Muddy Waters Research, a firm that has grabbed Wall Street attention by digging up dirt on Chinese companies, released a scathing report on Rino. It said Rino had vastly overstated its revenue, fabricated contracts and diverted tens of millions of dollars to its own executives.

Rino later owned up to some of the findings and cautioned that its financial statements from 2008, 2009 and early 2010 "should no longer be relied upon." Eventually, the Securities and Exchange Commission suspended trading in its stock.

Representatives of Rodman & Renshaw, which itself went public by assuming the ticker of a defunct company, declined to comment.

When it comes to China, the question on many investors' minds is how fast its economy can keep growing. Beijing has been trying to head off a new surge in inflation.

Back in the United States, there has been an explosion of class-action lawsuits, many of which are aimed at auditors and investment banks that brought Chinese companies to U.S. markets. Everyone is pointing fingers at everyone else: Lawyers are blaming the bankers, and the bankers are blaming the auditors, and the auditors are blaming executives in China.

Fanning the flames is an army of private investigators, bloggers and Wall Street short-sellers that hope to profit from the stock-market implosions, like Muddy Waters.

In the aftermath of the China meltdown, reverse mergers have slowed sharply, and the SEC has warned investors of risks associated with such deals. SEC officials met Chinese regulators two weeks ago in Beijing to discuss auditing rules for such companies.

Chinese regulators are worried.

"I hate these scandals; everybody hates them," Liu Qingsong, deputy director of the research center of the China Securities Regulatory Commission, said this month at a conference in Singapore, as reported by Reuters. "The scandals are very damaging to the reputation of all Chinese companies in the U.S."

Yet, for many, China seems irresistible, with money to be made and, invariably, lost. Since 1990, the benchmark stock index on the Shanghai exchange has soared 27-fold, despite a crash in 2008 and a lot of ups and downs in between.

One question that won't go away is whether investors can really trust the numbers in China. Even investors like John A. Paulson, the hedge fund manager who made a killing on the subprime collapse, have lost big in China.

Michael Licosati, a founder of Alder Capital, bought shares in Rino. Today, convinced that fraud is rampant in China, he is betting against such stocks.

"You cannot compare the capitalist system in the U.S. with the capitalist system in China," he says. Bank of America, another early Rino investor, declined to comment.

In Dalian, Qiu, Rino's chairwoman and the wife of its CEO, says only that it is business as usual at the company.

"What I can tell you is that our company is doing well and the operation has been very normal," she says.

Inside the gated compound, workers in tarred jerseys and goggles weld and drive screws. Back in New York, Rino's shares are frozen at 40 cents.