Disgraced,Morgan,Stanley,Distracted,Foreign,Funds Foreign affairs

　　The bribery scandal of former Mor- gan Stanley’s executive in China was fully exposed to the public, revealing a part of the flowing diagram of foreign property fund’s operation in China.
　　“These institutions are growing bigger and bigger in China and they procreated a lot of dark sides, which is thought to be normal thanks to their strategies of fast entry and withdrawal, as well as their own features,” said Mr. Jin, a senior executive at a Shanghai-based property fund company.
　　The financial crisis that started five years ago and the strict regulation policy in China seems to wear off the interest of European and U.S. speculators. But when the domestic funds are just upholding, the Singapore-based institutions that prefer owning and operating property business for the long term gradually become the main force of the market.
　　“Bird and Bow”
　　Morgan Stanley’s bribery case was known to the public because of its self-revelation in February 2009. At that time, Morgan Stanley submitted the open file to the U.S. Securities and Exchange Commission (SEC), revealing that Garth Peterson, director of the property department at its China branch might violate the U.S. Foreign Corrupt Practice Act. Prior to that, Morgan Stanley has already fired this Garth Peterson.
　　Therefore, Morgan Stanley was not blamed; instead, it became a co-investigator to provide assistance for relevant research.
　　Years later, Peterson admitted being guilty of offering bribes in Shanghai this April. Two projects in Shanghai were highly suspected of being related with the bribery. Truth to be told, Morgan Stanley earned a lot of money from these two projects.
　　The residential property project Lanson Place is the first project of Morgan Stanley in China. Its stock transfer may somewhat reveal how much Morgan Stanley profits from these deals. In 2003, Shanghai Yongye Property, which owned 30% of the stock of Lanson Place’s owner Shanghai Luxury, sold 25% of Shanghai Luxury’s stock to Morgan Stanley at 8.695 million U.S. dollars. In comparison, when Shanghai Luxury was initially founded in 1997, 30% of its stock was worth of 9.25 million U.S. dollars.“When the 25% stock was sold at 8.69 million U.S. dollars, the property market in China is on the ascending track. In 1997, the Asian financial crisis pushed the assets property to an extremely low level,” a Shanghai-based property company’s director said.
　　According to the data from SEC, when Morgan Stanley sold part of its stock rights of Lanson Place in 2006, Peterson and his Chinese partners benefited heavily from this deal. How much profit Morgan Stanley earned from this deal remains unknown. But the market price told us that the value of this property increased over twofold in recent years. 　　Another project in Madang Road, Shanghai, which was introduced by Peterson’s Chinese partner Wu Yonghua, former board chairman of Shanghai Yongye Property, also gave Morgan Stanley a huge amount of profits. In February 2007, Morgan Stanley and Shanghai Yongye spent 1.3 billion yuan in getting the slot of land for comprehensive purposes. Morgan Stanley took the dominant place in this project while Shanghai Yongye only took a minority share. In December 2010, Singapore-based CapitaMall Trust spent 3.86 billion yuan in buying 2/3 of this project’s stock. In this way, the whole project price increased about 4.5 times.
　　Prior to that, in July 2010, Morgan Stanley transferred its service apartment project in Lujiazui, Pudong to JP Morgan at 1.2 billion yuan. It is noteworthy that it acquired this project with only 700 million yuan in 2006.
　　In 2009, Morgan Stanley successively sold four of its property projects in China. One of them was the infamous unfinished project East Sea Square, which it sold to SOHO China at 2.45 billion yuan in August 2009. This project was acquired by Morgan Stanley from Hangzhou, Zhejiang-based property developer Green Town at 1.96 billion yuan in July 2006. Along with this project, Lanson Place, the Ever New City and Unlimited Square were also the projects sold in 2009.
　　The incomplete data shows that Morgan Stanley got the profits of 4 billion yuan from selling 7 projects in China from 2009 to 2010. All these projects were acquired during the reign of Peterson.
　　The exposal of the scandal about Peterson was forecasted and followed by a series of personnel changes in the property fund of Morgan Stanley. In May 2008, Robert Haso, former executive director of Morgan Stanley Property was moved to Singapore. Then, Peterson’s line manager Zain Fancy announced resignation. Sonny Kalsi, president of Morgan Stanley’s Property Investment was removed from his position. An unconfirmed source said that those people were all likely to be involved in Peterson’s bribery scandal.
　　 The Hidden Rule
　　Morgan Stanley’s involvement in bribery is actually expected by some analysts.
　　When Morgan Stanley became the first foreign fund in Shanghai’s property market after acquiring Lanson Place in 2003, European and American investment companies, represented by Goldman Sachs, Carlyle, Blackstone, ING, Hong Kong-based Hutchison Whampoa and Singapore-based CapitaLand all stepped into mainland China to chase the abundant profits. “When so many funds were hoarding in China, their primary task was to find a good project,” said a Shanghai-based senior property analyst. Because the trade related with these projects is the nonopen bulk trade, managers of the funds are also involved in the links of developers and government apart from tackling the difficulties in finding projects and finishing exchange settlement.“Good projects will only come to you when you have good channels and resources. Without these things, why are you given good projects?” 　　During Peterson’s reign, Morgan Stanley did very well in expanding and maintaining personnel relationship in China.
　　A source revealed that Garth Peterson was a specialist in China. He was born in Singapore and studied in a college in Hangzhou. He could speak fluent mandarin and Shanghai dialect with an excellent tongue skill. He was present in social activities as a senior executive in Morgan Stanley. Reuters praised him as “king of communication”. One concrete example listed by Reuters was that Peterson sent his daughter to the Soong Ching-ling Kindergarten and he usually sent and picked up his daughter before and after school. That gave him a lot of opportunities to talk with other parents, who were largely government officials or businessmen.
　　The years’ working experiences allowed Peterson to build a great relation network with the political and commercial circle in Beijing and Shanghai and well-stablished property enterprises. This laid a foundation for Morgan Stanley’s achievements in China. Apart from the “core person” Wu Yonghua and his Shanghai Yongye, the net also involved two companies that operated the national capital and other core institutions. Morgan Stanley also built relations with Chinese domestic development companies Agile, Forte and Green Town.
　　The aforementioned deals of Morgan Stanley could represent the operating pattern of western property funds in China. “The European and American funds usually held the projects for 3-5 years before finding the buyer.”
　　 Segmented Foreign Capital
　　After the gold rush in China from 2003 to 2007, Morgan Stanley and its American peers represented by Goldman Sachs seemed to lose their interest in the Chinese market which was gradually put under strict regulation and control.
　　The American and European funds realize arbitrage simply based on the periodic value increase of property assets. In recent years, the project pools in the first-tier cities of China began to be gradually cleared. Presently, Morgan Stanley only had very few assets in Beijing and Shanghai. Goldman Sachs also sold Hongqiao Apartment, its last project in Shanghai, last year.
　　“European and American funds are always seeking fast growth. Now they began to shift their focus to the high-quality projects in European and American market,” said Liu Feiguo, vice president of the property trade consultancy institution E-commercial China.
　　A survey report from E-commercial China said that the bulk trades in the property market in China were dominated by foreign funds before 2007. But the financial crisis in 2008 turned around the situation as the proportion of overseas investors decreases drastically in both trade quantity and volume. In comparison, the number of domestic investors had a great increase.
　　The report also pointed out that the number of foreign investors from Asian and Pacific regions gradually increased in these two years. According to the statistical data in 2011, investment from Singapore-based institutions accounted for 35% of total overseas market in China’s property market. “The Singaporean institutions represented by CapitaLand, Maple Tree and Ascendas have already had established strategies in the process from commercial development to investment and then to operation. They increase the project value with the focus on middle- and longterm ownership and good operation. Then they pack several projects together as REITs to go public in mainland China, Hong Kong or Singapore,” introduced Li Lin, who serves Jones Lang LaSalle as a director at the Asian-Pacific region and its investment head in Shanghai. “This is utterly different from the European and American institutions favoring fast entry and withdrawal.”

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