Jonathan Glick works for NCIL, syndicating and underwriting debt based investment to some of China’s biggest companies, such as China Mobile and China Telecom. Here, he shares some of his views on deal-making in China’s capital markets.

Is there big potential in China for foreign lenders to service business loans?

It depends how you look at it. To be frank, there’s no quality credit system in place in China right now, your average privately held company doesn’t have a reliable credit score. So if you’re not working with a blue-chip company or a leading MNC (multi-national corporation), you’re dealing with a more provincial, less sophisticated company. If we’re not that company’s friend, if we’re outside their relationship circle, we have no good way to know the banks or funds are going to get paid back.

So playing it extra-safe is a big part of your analytical role.

Necessity dictates that you have to have a higher risk aversion. That’s the reason why in its 14 years, my firm has never had a bad loan or client loan. When we roadshow a client or put together a pitch book and show it to a banking partner or institutional investor, they know it’s a quality transaction.

Someone might argue that all this inefficiency in the market means there are some big profits to be had from a company that had a model to serve non-blue chip enterprises.

The problem with their model is going to become, the risk factor will be so much higher, that people will want a lot more return on their money, and the loan will be unattractive to the borrower.

Do you envision a China in which non-blue chip enterprises can tap foreign lenders for capital?

I mentioned that there’s no quality credit system. Until there is one, only the highest quality companies are going to get foreign capital. For that matter, calling it foreign capital doesn’t necessarily mean it’s not Chinese. In today’s global market, it’s getting harder and harder to assign national origin to an investment, and to talk of foreign and local capital. For example, NCIL is a foreign owned company. The owners are all American citizens who were born and grew up in China.

So give us your take on what distinguishes the Chinese company structure, why it’s such a well-discussed conundrum.

I don’t know that I have any revelations, but I do think it helps to understand how highly centralized the Chinese company is. In a traditional company’s organizational structure, you have a group or one person at top, three report to him, four or five report to them, and so on.

Now, to envision the Chinese company, draw a small circle with a hundred different lines coming out of it, and circles on the end of those – that’s a typical Chinese corporation. The central circle is the decision maker. In some companies it’s going to be an HR person, in some companies it’s the CFO. In a government entity it might be a party secretary.

Now, even if you have only one decision maker, he has to balance all the interests of all those other circles. That’s why Chinese companies move more slowly; the decision maker has to keep the balance in mind like no Western executive. However, once a decision’s truly been made, then things can be executed very quickly.

I say “truly” because in China a decision isn’t always a final decision. A ‘yes’ is often just a promise to test the waters, even if a contract has been signed. Jack Perkowski [founder and CEO of ASIMCO] said it best, “When you sign a contract in China, that’s only the start of negotiation.”

A lot of Chinese companies are trying hard to get beyond this structure. The younger generations realize the faults within this model. They’re not going to just use a blanket Western style, but they’re definitely trying to improve on current structure.

Give us some cross-cultural tips on how to conduct due diligence without incurring loss of face, please.

Be patient. Listen to what someone isn’t saying rather than what they’re saying. Intuition will tell you a lot. If you’re asking someone questions and they’re not answering them, you either have a problem with your translator, or someone’s misleading you.

It’s common knowledge that in China most companies keep three or four sets of books. Accounting standards have changed, but you still have to be very careful with how the company you’re evaluating recognizes their receivables. Often times, a Chinese company will record a sale that they won’t receive cash for until 18 months later.

When you’re looking at projections, they are virtually all grotesquely optimistic. There’s always an attitude of “Look how much this country has grown; look how much the economy has grown; can’t we assume multiples of 150%?” If someone’s sales forecasts are a thousand units for ’08, then their new product line will be 2,000, and the year after that 4500. But if you’re launching a new product line or division, your costs are going to be astronomical to keep up with that demand. That’s why if I was doing equity investments, I would avoid three-year investments based on rapid and explosive growth. I want to deal with somebody who has a vision for their company that outlasts his lifetime, if possible.

How do we cultivate a good relationship with today’s younger generation of Chinese player, the one who’s been abroad for his MBA? Surely there’s more to it than KTV and bai jiu.

You forgot the kickbacks (laughs). You’re probably going to be playing a few rounds of golf also. Keep in mind, though, that if your prospects only want to drink and party, and meetings don’t start until six in the evening, they won’t be very good partners. Have you met any of the execution people? Any people on the ground?

Relationships take time. If someone thinks he can just come to China, do the dinner and KTV circuit for one or two years, and have quality relationships, he’s in for a huge letdown. Here’s a recipe for building those relationships that I think is applicable anywhere: under promise, over deliver. Be their first; leave last.