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Investing In China: The 21 Century Powerhouse
From The International Speculator
by Doug Casey
.Doug Casey is a considered one of the best offshore investment consultants around. He writes books, lectures, gives seminars and publishes the Intenational Speculator. We know a lot of people who have made money following Doug Casey's advice. This article is excerpted from a recent issue of the International Speculator <http://www.douglascasey.com/>, now in its 19th year of publication. Doug Casey has made a career of finding winning speculations. In fact he picks more winners than most supposedly "conservative" stock portfolios and mutual funds but for much higher returns. He's had hundreds of 100% plus hits over the last 20 years and as much as 10,000% just last year. Its' an amazing track record. China: The 21 Century Powerhouse Somehow, the perception which lingers in the West is that China is still "Red China," dominated by aggressive "Chicoms," waving their little Red Books, full of hatred for America. The leadership is depicted as a bunch of Fu Manchu look-a-likes plotting world conquest. Despite the fact similar things happen in every major country in the world, prominently including America, religious persecution, censorship and dissidents in prison are made out to be the essence of the country. I'm here to tell you that the reality is vastly different from the perception. Chinese cities are full of department stores that are completely indistinguishable from those in the United States, the same quality and quantity of goods, just lower prices. And jammed with shoppers, mostly talking on their cell phones while they pick things out. 40% of the businesses are privately owned and it's estimated that will be 60% in a few years. The constitution has been changed to acknowledge the importance of entrepreneurship and private property. And the rate of change is accelerating. The Blade Runner City If you want to see the future of China, that's Shanghai. Beijing has palaces, government offices, more interesting small shops, and better food. But there's already nothing like Shanghai on the planet, and the place is still under construction, with the national bird of China, the Construction Crane, in evidence everywhere. I sat in the superb bar on the 85th floor of the Grand Hyatt (like Hiltons and Sheratons abroad, there's no comparison with the domestic counterparts), smoking a Cohiba Lancero and sipping a Courvoisier, surrounded by vintage art. It was dark and foggy with light drizzle and, as a large blimp drifted by about 40 stories below me, its aerostat illuminated with advertising in Chinese, it became clear that I was already living in the world of the Blade Runner. Some people complain that development is tearing down most of Old Shanghai, with its quaint narrow alleys and walled family compounds. I say good riddance. It's nice for tourists to walk around a real-life Disneyland, maintained at the expense of the natives. But living in a centuries old uninsulated building, devoid of heat in the damp winter, air conditioning in the muggy summer, and proper sanitation year round is nobody's idea of a good time. I have little doubt that Shanghai will soon be the world's most modern and prosperous city. Trying to translate that academic impression in dollar terms, I checked the prices of a condo in a new, top-class high rise. You'll currrently pay about US$120 per square foot-quite cheap by New York, London, or Hong Kong standards, and down considerably from a few years ago. I check property prices wherever I go, looking for trends and anomalies. Especially anomalies, because that's where real money can be made quickly. Shanghai is fairly cheap, but not at giveaway levels like Hong Kong in 1986 when I acquired a great apartment there (see CI90s, Chap 27). And, unless the location is unique, I like to stay away from condos as investments. The problems are that the supply is potentially unlimited, they're expensive to maintain, and they're depreciating assets. In Shanghai, top-grade office space is running 35% vacancy, although that's down from 43% in the second quarter. In the United States that would be a sign of a depression; here it's just an indication of the huge new supply of buildings. I'll make a case for a continuing economic boom in China below. But that's irrelevant if the place is a pressure cooker about to blow. Some people seem to think the Chinese masses are going to rise up and demand democracy. I think not. Little Democracy, Lots of Freedom The words "freedom" and "democracy" are often bantered about in the Western press with regard to China, and the place is usually found wanting in both. Democracy is supposed to be the paragon of all political systems, to be strived for above all else. It just shows how little credit should be given to the opinions of journalists. My own views on democracy are well known to long-time subscribers-it's a costly charade that transforms what might otherwise be decent human beings into "citizens" concerned with their neighbors' business. Winston Churchill said something like "Democracy is the worst system of government there is, except for every other system of government" and hacks often cite it as a gem of wisdom. But it's like saying "Cancer is the worst disease there is, except for every other terminal disease;" it's actually better, and possible, to be disease free. And politics of any description are a disease. Question: Would you rather live in a "democracy" that takes over 40% of everything you earn, then half of what's left when you die, while making your life miserable with a morass of laws and regulations? Or a "dictatorship" that steals very little of your income, leaves your estate intact, and basically leaves you alone as long as you don't try to change the status quo? Of course it's a Hobson's Choice, but I would definitely choose the latter. In the hypothetical democracy you're more-or-less a slave except that you have the right to cast a totally meaningless vote for a government that pays lip service to the concept of freedom. In the hypothetical dictatorship you're more-or-less free, while the government, though paying lip service to its right to control everything, leaves you pretty much alone. I'm not saying that's an accurate description of the way things are in the United States and China today but, in fact, China is in many ways freer and lower taxed than the United States. And it's heading rapidly in the right direction, unlike the U.S. But freedom in China is quite compartmentalized. As a practical matter the Chinese are very free in the economic and social spheres. Almost everyone has a TV and the government can't (nor does it try) keep them from putting up dishes. Buying computers is encouraged and China is becoming one of the most "wired" countries on the planet. What you don't have freedom to do is challenge the rule of the Party. State and Party The ruling cadres in China, eminently practical, have reduced government there to its essence: A vehicle to enrich and aggrandize those in power. In China the government doesn't actually control things; it's just a vehicle for the convenience of the Party. The Party made a clever trade-off in free-marketizing the economy. In the days of Mao, the State owned everything- but "everything" was a worthless pile of junk overrun by ignorant peasants. Now, however, the State only acts as an increasingly small parasite on a rapidly growing enterprise; 10% of a gigantic pie is much bigger than 100% of a tiny pie. Everything in China is being privatized, including about 20,000 enterprises owned by the Army alone. That's not to say the influence of the State has been entirely negative. There is, for instance, the famous example of how the rats of Beijing were nearly eradicated by requiring everyone to present a rat tail to the local officials. But people fail to consider that you never see rats on private property, only on "unowned" (State) property. It never occurs to them that the problem is the presence of State ownership, not the lack of State mandates. Another alleged triumph of State planning is the reduction of population growth by limiting each family to one child, forcing abortions for those who disobey. But this triumph of State planning is only "necessary" in order to undo the last triumph of State planning, when Mao urged Chinese to multiply as quickly as possible during the 50's and 60's, to overwhelm the West through sheer force of numbers. It will be interesting to see the unintended consequences of the current campaign, because people only abort the relatively undesirable female babies. Twenty years from now they'll have 100 million spare males, equipped with raging hormones; and young unmarried male humans are the most dangerous creatures, including the T-Rex, ever to walk the face of the planet. Well, I suppose you should look at the bright side; perhaps it will create a bull market in young European and American females, however uncomely. The fascination with the theoretical power of the State to conduct experiments in social engineering knows no limits. It could conceivably require the 1.2 billion to each catch ten flies a day and rid the country of flies. That kind of thinking leads to all kinds of cockamamie possibilities. Maybe just 10% of the country should be commanded to march across the border to overwhelm the Vietnamese. Maybe it doesn't matter if a nuclear war with America is provoked, because even 50% casualties leaves 600 million? The possibilities for megalomania and idiocy are unlimited. But, fortunately, they're increasingly unlikely. Like people everywhere, as the Chinese gain scope for making money personally, they're less concerned with the cadre's grand schemes. It's become possible for them, over the last 20 years, to "get a life." I'm not going to say that Beijing and Shanghai have yet acquired the vibrancy of New York, but unlike even 10 years ago, there are now good restaurants on almost any street. And a world-class Peking duck for two, with all the drinks and extras, is only $30. Falun Gong China's brief experiment with Maoism was just another blip on the 5,000-year screen of Chinese history. And Mao will be viewed in the future as just the founder of another dynasty, even though you can find taxi drivers with little icons of him hanging from their rearview mirrors, a form of dashboard Jesus. But dynasties don't last long in today's world, and the one Mao founded in 1949 is getting long in the tooth. The 1989 Tianamen affair and now the Falun Gong phenomenon are straws in the wind. Falun Gong, like most religions, deals with existential angst through an admixture of common sense advice, cockama-mie fabrications, sensible practices, and atavistic superstitions. Nothing Tony Robbins couldn't cobble together on a spare weekend, but it's garnered millions of followers. There are some yuppies in it but, like most similar movements, most of its adherents are discontented folks with time on their hands. People who are vaguely unhappy with things, on at least a cosmic if not temporal level, can get into real trouble if they reach a critical mass. It was predictable that the Falun Gong sect would be put down and the fact it has religious overtones is irrelevant. The Party no longer really cares what individuals do or think; it just can't tolerate loyalty to any other group. It's just good Realpolitick to squash them before things take on a life of their own. Falun Gong has some parallels to the Fists of Righteousness and Harmony, better known as the Boxers, whose rise at the turn of the last century was a harbinger to the end of the Qing dynasty. And to the mid-nineteenth century Taiping Heavenly Kingdom, whose leader claimed to be the younger brother of Jesus Christ and led a nationwide revolt that nearly overthrewth e Qings. Or the Yellow Turbans, the White Lotus and other colorfully named quasi-religious sects that sowed widespread dissent during earlier dynasties. Rulers are overthrown for basically two reasons: 1) they lose their moral right to rule in the popular view, and 2) they are seen as too weak to maintain their position. The Party still has an aura of legitimacy because it can claim to have defeated the Japanese and other foreign imperialists, made education available to all classes, made China a world power, and led the huge economic boom of the last 20 years. But memories are short, and the Party's widely viewed as what it actually is by street-smart Chinese: A sophisticated scam run for the benefit of the Nomenklatura. The Party still has real power, which it demonstrated at Tiananmen in 1989. But as the free-market leads to free minds, the handwriting is on the wall. The Party is on its way to the dustbin of history, purely as a matter of historical imperative; Marx would be amused in spite of himself. But how can we guess how China will evolve as the old hacks die off? One way to get a grip on it might be to compare the Chinese with the Japanese.
Investing In China: The 21 Century Powerhouse - Page Two
From The International Speculator
by Doug Casey
Societal differences Most Americans are provincial. If they travel anywhere, it's likely to be to Western Europe; the Orient (forget about Africa and South America) is pretty much Terra Incognita. The distinctions between the different countries and cultures in the Orient -which are as least as great as those in Europe - escape most of them. It's dangerous making broad generalizations about millions of people, including Americans, but the reason ethnic jokes are so funny is that while they generalize and exaggerate, they also crystallize the essence of various cultures. The two dominant countries in the Orient are China and Japan, and their cultural differences are as distinct as those of the Swedes and the Sicilians. In a nutshell, Chinese culture is notably more lenient, more tolerant, more anarchistic, rebellious, creative, and individualistic; the Japanese are stricter, by-the book, group-oriented, organized, and obedient. The differences are illustrated crisply in martial arts, something I have personal familiarity with, but they extend across into everything. Look at some eclectic areas. Martial arts- I've taken Japanese Karate and Judo, Chinese Kung Fu, and (mostly) Korean Tae Kwon Do over the years. The Koreans, having been dominated and generally brutalized by the Japanese, don't like them; but they're more Japanese than the Japanese themselves. Karate classes are tightly organized, starting with everyone at attention, lined up strictly according to rank and seniority. Next is a round of bowing to the national flags and the master, followed by a period of organized calisthenics. Then everyone practices various punches, kicks, blocks, and sparring techniques together. The class ends with another ceremonial. All very by-the-book, like a factory for self defense. At Kung Fu classes, on the other hand, students wander in gradually to warm up on their own. Class coalesces unceremoniously, there's no display of rank, there's much more individual practice, and the class ends informally. Karate lends itself to group instruction, with its simple, direct moves; Kung Fu forms are much more sophisticated and complex and demand individual instruction. Like any mass-produced product, karate is easy to use and useful for everyone up to a certain level, whereas Kung-fu is really only effective when used by a master. But then there's nothing better. Cuisine- Two elements stand out: the way food is prepared, and how it's served. Japanese food is often served raw and is always served in an artistic manner. Chinese is almost always cooked and served in simple plates. It's anomalous to other cultural differences that the Japanese usually serve food in individual portions, whereas the Chinese use communal bowls. Still, the essential difference is in the structured ceremony of Japan, versus informality of China. That distinction is underlined with the way tea is served. The Japanese have a highly rehearsed tea ceremony; if you've ever been to a traditional Chinese restaurant, you'll know the waiter is likely to slop half the tea on the tablecloth. Status of women- Japanese women are traditionally very subservient and still have little role outside the home; they're expected to know their place and keep it. Chinese women are actively involved in business and all areas of life, a huge plus for the Chinese. There are no Japanese equivalents to Madame Chiang Kai-shek or Madame Mao; the Dragon Lady is Chinese, not Japanese. Japan is a fairly sexually liberated society, but China is quite conservative, even Puritanical. That may just be an artifact of communism-all communist countries were highly puritanical, or a natural consequence of a rural, traditional society; in any event, I expect it will change. Corporate culture- The Japanese are famous for their zaibatsu (and the Koreans their chaebols), giant conglomerates with close relations to the government, populated by salary men. The Chinese have no equivalent, and are far more entreprenurial as a culture. In an industry where the Japanese would have two or three giants, centrally directed, the Chinese would have dozens of small ones, each doing its own thing. Use a mainframe and scores of small PC's for an analogy. Japanese companies tend to run on debt; that will make it tough on them if the economy slows down. Chinese companies run on equity. Government- The Japanese see their government as being almost synonymous with the country. They follow orders, and not paying one's taxes is considered a shameful thing. They look to the government to organize society. The Chinese view their government as a parasite that's relevant only insofar as it can extract money from them-and they feel a moral obligation to deny the State revenue wherever possible. After all, it's money that's leaving their extended family and going into the coffers of someone else's. Investing- The Japanese have a buy-and-hold mentality; one evidence of that, perhaps, is their custom of cross-ownership of the shares of companies that do business with each other. That would be out of the question for the Chinese, who would deploy the capital in their own businesses rather than bet on strangers. The Chinese are probably the greatest gamblers in the world and that's how they tend to view the stock market; they're a nation of day-traders. Some of these distinctions are much more applicable to making investment decisions than others, but it's important because, as Sun-Tsu observed, knowing the mindset of your opponent is critical to winning the battle. Japan was well equipped to deal with the 20th century-a structured, mechanistic, industrial, clockwork kind of world. I don't think it will mesh well with the 21st. Chinese attitudes suit them ideally for the 21st century-a freeform, opportunistic, digital kind of world. I again refer you to Diamond Age by Neal Stephenson, about nanotechnic society 50 years from now; it's no accident he set the scene in Shanghai. The 50's and the 60's were America's decades; the 70's (anomalously) belonged to the Arabs and others who had the good luck to be born on a pool of oil; in the 80's it looked like the Japanese would take over the world; the 90's were again America's. From here on China will dominate. And it will have nothing to do with choo-choo train economy factors like location, geography, or resources. Why the future is better than just good What are the big dangers in China? Most people seem to think the potential problems are political, that the Chinese will start a war, revert to communism, or have an internal upheaval. Anything is possible, of course, but these things are unlikely. Most Americans, never having traveled, only know what they've learned from movies, the TV, newspapers - basically sensationalized hearsay. The chances of China going back to anything even remotely resembling The Great Leap Forward or the Cultural Revolution are Slim and None, and Slim's out of town. If a war erupts with the United States in the next decade, a less remote possibility for the reasons I discussed in a past issue on the Fourth Turning, it's most likely going to be provoked by the United States. The real danger is financial. There are five very large State-owned banks where the workers and peasants keep almost all of their considerable savings. The problem is that these banks have been acting like para-statals anywhere: they lend money in ways that seem politically smart, but may make no economic sense. That spells hundreds of billions of dollars of bad loans. The government is not about to risk the upheaval that would result from people not getting their money from the banks, so the alternative is inevitable: print enough up so that everybody gets theirs. That's bad for all kinds of reasons I won't repeat here. But the good news is that 900 million of the Chinese are still peasants, and most of their assets are tangible, despite their high savings rate. They're relatively insulated from inflation. Even the worst case is unlikely to be very bad, however, simply because of China's stage of evolution, and the character of its society. Three things stand out in those regards: 1) A person can cover his or her basic living expenses for 50 yuan a month-or about US20 cents a day. That's sharing poor quarters with a bunch of other people, eating very little, and buying nothing else. But in a country where, only 20 years ago, everybody lived exactly at that level, people are still willing and able to cut back. 2) The typical Chinese saves about 50% of his income-even if he only earns US$50-100 a month, about the average wage range. If subsistence is US$4 a month, you can live acceptably for $50, while still saving $50. That means the average Chinese has assets that can tide him over many months if the going gets tough. One thing making that possible is the absence of any taxes until a relatively high level of income. 3) An extended family acts as real social security. The family is a very big deal in China, unlike modern America, where it's mostly a theoretical icon at political rallies. The family exerts moral opprobrium to keep its members on a righteous path, but also to help them along if things go sideways. There is no permanent underclass cemented to the bottom by institutionalized State welfare. These factors fairly well cover the downside in case The Greater Depression materializes. But, good times or bad, there's a huge community, perhaps 50 million, of Overseas Chinese around the world; as a group they're among the wealthiest people on the planet; they represent an immense pool of capital that's increasingly available as China becomes more open. Capital, economic freedom, a Confucian work ethic, a respect for education, and a culture that seems attuned to the likely environment of the future: What more is needed for success? Bottom line There's every reason to believe that China is doing, on a grand scale, what Hong Kong, Taiwan, and Singapore (which is essentially a Chinese city) have each done over the past few decades: rise from abject poverty to immense wealth. Here's what it adds up to: You can speculate on the future in Europe or America. But China is where the future is already here, and it's going to continue advancing, at warp speed. It doesn't matter whether the financial markets boom, or whether the Greater Depression materializes. China has grown at near double-digit rates for well over a decade now, while the United States stumbles along at less than 3% during a boom, despite having vastly more capital of every type. Your serious venture capital should look to China for big returns. It's a market where $492 of seed capital raised in 1992 for the Fortune Pharmaceutical group lead to the company showing $60 million in sales and $7 million in profits this year, and where the Broad Air Conditioning company built a $200 million company from a $4000 grubstake in 1988. These are real companies, with profits, not .com promotions that fritter away millions to gain fickle "eyes." There will be many more in the years to come. This month's featured company, I think, will be one of them. To get information on Doug's current stock picks and investment information it is recommended that you subscribe to the International Speculator <http://www.douglascasey.com/> - |
