Capvision headquarters in China – Photo: BLOOMBERG
For hedge funds and global investors, the vast network of Chinese advisers has become their main tool for understanding a potentially lucrative economic powerhouse.
According to Bloomberg News, the network of consultants a decade ago was praised for helping China’s economic development, but until now, this “consultant industry” that uses secretive Chinese is not considered a threat to national security, it must be controlled.
This contradiction is sending shockwaves across the financial world when China on May 9 accused consulting firm Capvision of encouraging experts to leak state secrets and take consultancy projects from companies with close ties to foreign intelligence.
Authorities raided Capvision’s offices, questioned employees and removed equipment.
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China has launched an anti-espionage campaign focused exclusively on Capvision – a giant in the network of specialists – with offices in Shanghai and New York.
The rapidly growing network of experts in China in recent years is an important channel for foreign companies – investment funds, banks, venture capital funds or multinational companies – to access factual information on everything from industry trends to government policies.
As of 2016, these specialist consulting firms are still heavily supported. The People’s Daily called them “indispensable” to improve China’s economy. Capvision was praised for being a “well-regulated network of professionals” and “fully supervised”.
According to Capvision’s books, the company has more than 450,000 freelance consultants, making it the most prominent consulting network in China.
Consulting prices at Capvision range from $71/hour to $10,000/hour, according to a prospectus published in 2022.
According to Capvision’s website, which was founded in 2006, it has more than 2,000 clients, including some of the top global consultancies, private equity funds and banks.
Founder and CEO Xu Rujie is the largest shareholder with a 29.4% stake. The prospectus says that by 2020, the company will have 33% market share in China’s consultant network.
What do customers often ask experts?
To better understand Chinese government policy, investors use a network of Chinese experts. For example, an automobile manufacturer contacted a group of Chinese consultants to seek more factual information in addition to official plans to tighten emissions standards in China, thereby helping to adjust the company’s production planning.
Or when the Chinese government took a close look at healthy food products in 2019, an Asian hedge fund used information gleaned from a network of experts to conclude that US companies’ nutrition operations in China will struggle to sell inventory.
Thanks to the first information, the fund manager shorted shares of US companies before they fell 50% in the following months.
Red line
According to a senior analyst at a US bank, a former China employee in the US, upon becoming an expert on China, can receive an “expert” 3-4 times higher than the “market price”.
The person also added that former Chinese officials generally know where the red lines are and are cautious about sharing confidential information.
However, there are many ways to “get around the law”. According to a global investor, a former employee offered advice using hypothetical examples.
To avoid comments about government policy that has not been made public, they often use phrases such as “if I were investing my own money”. This investor followed the diplomat’s hypothetical advice, buying stocks that were weakening before recovering to be among the best deals of the year.
But it is also because of these characteristics: informal conversations, uneven surveillance, sensitive topics, that the Chinese government has recently “turned the wheel” to “private specialist industry”. This problem “needs to be controlled.
