Hi Jacob, I sign on to the thread and noted the 70 + posts since my last lurk. The thread has gone off the deep end.
I prepared my post before having had a chance to look at the last 56 posts, and so I may be off base already in responding to your post to me. If so, oh, well. Here it goes with the clip copy and paste ... ouch
Please know that I am, as in the subject of “Collapse 2001”, not so much attempting to convince folks of my point of view, but more to explain my point of view, taking care to disclose my position/interest so that folks can evaluate what I note by what I do. I like to see my thoughts in print, and I use SI as a diary (I do backup the bits on my own storage device as well).
On the subject of financial market, to the extent that it impacts my NAV, I am interested, and also interested in reading the opinions of others. On the subject of China, to the extent that it impacts my business, I am similarly interested. Otherwise, I prefer to spend my time with family and friends, scuba diving or computer gaming, and every now and then, in solitary jogging exercise along the neighborhood cliff path.
I am writing this note on the airplane ride from Beijing to Shanghai, going from my electric power client to my insurance company client, from China’s political capital to the its financial capital. This is my first trip to Shanghai in 6 months or more. What I am about to write, I am making it up as go. I may be easily picked apart.
<<China is so big … inertia and mass will give it different dynamics than other developing nations... qualitative difference, or just a quantitative difference?>>
Difficult to steer inertia or ponderous mass is not an advantage. It takes a lot of political manipulation to get a high inertia and massive country to move in a desired direction at any speed; and if it is going in the wrong direction, the terminal stop could prove terminal to many. I also do not believe inertia and mass are enough to sustain an otherwise however advantageous set of dynamics or qualitative differences for developing countries. Inertia and mass are negative attributes, at least at the ‘take off’ stage. India, compared to China, is equally endowed with inertia and mass, and yet so different. There must be other ingredients that go into the secret sauce.
I think the following are some of the important attributes (by absolutely no means exhaustive) necessary to initiate and sustain progress out of poverty, and not in any order of priority: political leadership, social cohesion, common understanding and agreement of the script. Without these four prerequisites, I believe every bit of effort will be ultimately wasted. All the rest of the ingredients (legal, capital formation/import, … health, …) can only be effectively mobilized when the above four and other not specifically mentioned conditions are ‘ready’. The main difference between India and China can be explained by the four attributes.
By China is big, and of continental dimensions, I am in some sense referring to the fact that its talent set is more or less ‘complete’, needing ‘imports’ here and there, but not everywhere. Its domestic economy, once mobilized and pointed in any (right or wrong) direction, will tend to roll along until it stops itself. Its initial set of GDP contributors are more or less self-sustaining and all ‘complete’, thus not requiring subsequent development to be skewed to continuing export of certain things; by this I mean export is a consequence of development, as opposed to development is beholden to continued export.
The numbers are vague, but somewhere between 60-80% of all foreign direct investment into China over the past 20 years originated from the overseas Chinese Diaspora. The offshore Chinese are of all different flavors, from Taiwan, Hong Kong and Southeast Asia in the majority, but also from places as far away as Iceland and South Africa. These projects tend to be, at least initially, export oriented, and tend to provide a lot of direct employment. The success of these investments also encouraged local aggregation of capital and establishment of local competitors.
The highly visible projects constitutes about 20%, comprised of the Motorolas and Ericssons, the GMs and Fords, the Cokes and Procters, the Starbucks and McDees, and these often, or more absolutely, always, involve proprietary know-how, complicated sub-contractor capabilities and relationships, exclusive distribution channels, global brands, and these are mostly, at least initially, meant as investments to access China market. These investments do not directly provide a lot of employment, but tend to have large effects on indirect employment. For example, Coca Cola’s syrup facility is a wholly-owned company in Tianjin, while their bottling plants (more than 25 around the country) are mostly joint ventures with on-shore or off-shore Chinese. The direct employment attributable to Coke cannot be that many, but think about the can and case makers, the distribution channel truck drivers, and the competition engendered by Coke’s success in proving that money can be made from selling sugared water.
Now, in India, which is also ‘big’, foreign capital has been horribly treated, with contempt in fact. Further, if the offshore Indian Diaspora does not invest in India, why should anyone else? The Indian political system has so far been unsuccessful in attracting and holding on to foreign direct investment in any quantity, and the same political and socioeconomic infrastructure, for the same reasons, has been a glaring failure in encouraging the formation of new-money private enterprises. The Indian democracy has been a fantastically successful at evenly distributing poverty in the best of socialist tradition. The consequence should the Indians fail will be horrible for the subcontinent.
Please do not misunderstand my point in thinking I am against democracy and freedom of choice (cannot be further from the truth). And no, I am also not so much writing off India (in response to Dave Sterns’ query) as much as questioning whether India is in fact a country as opposed to a concept.
Ooh, now Jay is treading on quicksand supported by marsh. My post, and so let me continue. India is a mishmash of ethnic groups speaking a bunch of distinct languages, divided along caste, education, socioeconomic, political and religious lines, governed by an ostensibly democratic system, but where the leadership is in fact always the same bunch, beholden to the same class of big, long lasting and in effect feudal family groupings. There is ample precedent that truly revolutionary changes are invariably accompanied by bloodletting, where the existing order is swiped away. Well, I am definitely not recommending this process for the Indians, but then, without the blood curdling screams, the change process will take much longer time. “Evolution vs. revolution?”, that is a question to which I have no answer, and no recommendation, and when decided upon, I do not even want to be around.
No, absolutely not. I simply believe there are certain foundations that must be laid before a previously closed, large, authoritarian agrarian system can be more safely and sustainable-ly transformed into a modern, industrial, technological, open system. Social stability, housing, food, clothing, education, economic opportunity, and finally, joint vision for change. Short cuts are possible; success depended on special situations; applicability to one billion people barely surviving on an existing platform, none.
<<A developing nation can grow its economy … investing capital ... external and internal … living standards very low, and enforcing strict discipline, for a couple of generations>> …
If by this you mean “hard work and thrift”, it would be correct.
<<Stalin's and Mao's method>>
and also, in different ways, Japan, Korea, Singapore, Hong Kong, ….
This next observation will no doubt be controversial. What the US folks must remember is that the US was a piece of wealth found, ripped from its then inhabitants, and subsequently developed through work and thrift. It is as if someone had found a gold mine in the hills, killed the owners, started digging and selling the gold. Given the hostile environment the early settlers found themselves in, cooperation was crucial to survival, and thus rule by feudal dictatorship was out of the question and out of smarts of the then politicians. There were too many guns all around. Democracy was a necessity.
To add contention to controversy, to build a modern society on an existing feudal platform while being harassed by invaders is an experience the US did not go through, and neither did many of the European colonial empire builders, and cannot remotely appreciate. The US way was the relatively easy way, and certainly the lucky way, not to be duplicated without tremendous violence.
I will no doubt generate some posts in response to above remarks. Oh, well.
<<So, a growing economy means China has to continue to attract foreign capital (at the rate of U.S. $10s of billions/year). That foreign capital can only be attracted … if there are foreign markets to sell into. The domestic market, the levels of domestic consumption, is still not nearly enough to justify foreign capital investment anywhere near the current levels>>
True on attraction of foreign capital, and it is in the range of 30-40 billion per annum, still in the majority accounted for by offshore Chinese money. False on motivation of the capital, due more likely than not to US media’s serious underestimation of what is taking place in China. Foreign markets are an important consideration. The domestic market is a much greater consideration. Guiding this investment flow is my life, and I cannot be that far wrong on this point.
<<Eventually, domestic consumption will be the main driver, but that point is still a number of years off>>
I believe the cross-over point (domestic over export motivation) happened already and now both domestic and export will be important engines of growth, with domestic being the more important.
<<vast pent-up demand … Sudan … demand will never be met (in either China or Sudan)>>
New homes are being built and sold at market prices. Existing state-owned (old, lower quality) homes are being sold to their current occupants at about 10% of market price, if they wish to buy. The demand will never be met in Sudan because no demand will be met. The demand will never be met in China because the demand is only being met by the growing but limited stock of supply.
<<… unless the proper environment for capital is present. And my point was, that "proper environment" requires foreign consumers to keep buying.>>
The Asian Financial Crisis proved to be a blessing to China because it so weakened the SE Asian and Korean competitors that China, even measured on political stability and corruption basis, scored high against the alternatives, without even considering the reform and market size issues.
The US technology boom also proved to be a blessing to China in ways you no doubt know about.
Fact of the matter is, China is today, and has been for the past 20 years, the most drastic, fastest, smoothest, and most successful example of overall national reform in the world, bar none, irregardless of TianAnMen or Falungong or a bunch of professors accused of spying, convicted, and then returning to their university post in Money Rock Hong Kong and Freedom Mountain Kowloon. No right, no wrong, just is, for the greater good, because there is no other way.
They did all under the guidance that can be summed up in three catch phrases, some of which you are familiar with:
(a) it does not matter if a cat is black or white, as long as it catches mice
(b) seek truths from facts
(c) cross the river steadily while feeling the stones to step on
The typical non-Chinese outside observer would believe these catch phrases, while sounding cute, have no application in the tactical and strategic decisions being made at all levels of Chinese society. The reality is the catch phrases stop a lot of heated arguments everyday, at all levels, for all kinds of decisions.
<<Re: privatizing state-owned enterprises: Is it true that most of these, as in the Soviet Union, are net value-subtractors? That is, the raw materials they use, are worth more, in world markets, than the finished products are? Isn't this broadly true, with the exception of the defense industry, which won't be privatized? So......aside from accounting games, the actual value of these companies is........nothing. Therefore: all the value-added in the Chinese economy happens in the private sector, and the defense industry.>>
Absolutely not true. Here is why …
I have dug into the books and the operations of many state-owned enterprises, and I do come across absolute disasters, companies that are rotten to the very core of their existence, and management that should, in my enlightened opinion, be lined up against the proverbial wall.
I have also dug into many state-owned enterprises that are beautifully run.
But, the majority of the companies I have dug into to falls under the category of “here is a viable business, but too bad it is saddled with so much social obligations”. Under the communist scheme companies were in fact micro-societies, with obligations to provide hospital, nursery, school, employment for family members of regular employees, etc. It is absolutely amazing that the state-owned enterprises survived as long as they did, and much can be explained by the previous-post mentioned bank loans. These companies all typically have 4-10 times as much assets and people as needed for the core business, and were dictated by the state to keep producing things that no longer were needed, or current.
Now, how much is such a business worth?
You correctly said “zero”, assuming the new owner must continue the company in exactly the traditional fashion.
Take your average US trained MBA, and give her the freedom to completely restructure the company before and after privatizing it. Taking consideration of the company’s distribution channels. Taking further consideration of the overall economic reform and opportunities for sustainable growth. Now how much is the company worth? Two times earning, 30% of book? Sold.
The privatizing scheme in China is done quite methodically, with each city given a quota of allowed lay-offs per year, which than dictate the pace of privatization of that city’s state-owned enterprises. The privatization is not only through IPO on the stock market, but many companies are sold to the staff within that company.
Many matters are in motion here and the economic landscape is sprinkled with new and transferred concepts literally everyday. A revolution is happening.
One expected but not thought of wrinkle in all this privatization process is that the Communist Party already knows it will have to face a genuine election one day and is studying the ‘hows’ and ‘whats’. Village level election under US observation has already taken place across the country. Experiences are being collated and discussed at the highest levels. The ‘communists’ themselves noted that elections would be bad for them but the lack of elections would be worse. One issue of particular concern is party financing. To get ready for going to the electorate with a begging bowl in hand is not on the agenda, and so, like the KMT in Taiwan, the answer to the sustainable financing requirement lies within the state-owned enterprise privatization process. I believe this is one of many reasons why the gold sector has not yet been ‘reformed’. Currently, the Party, the Government and the State-owned Enterprises are one and the same. One day, and that day gets closer everyday, this will no longer be true. So, what equity ownership (through foundations on the Taiwan model) the Party wants to arrange for itself, it is starting now. The Communist Party is in fact taking lessons from the grandmaster, the KMT, right now.
<<Someone mentioned India as a possible rival to China>>
India is always mentioned as a possible rival to China, especially by Business Week and the Economist, once every two years, with the years in between filled in with Brazil, Russia, Easter Europe, Indonesia and whatever else.
Well, Eastern Europe can be equated to a few mega-Chinese cities, and what has Brazil ever done? So, yes, India is trotted out once every two years, until one fine day, it will be no longer. I have a good Indian Moslem friend whose mother is a minister in India. I was asked not long ago to host a strategy think tank person from India who wanted to learn about China. I did the best I could. One of the strategist questions was “how much do people in China talk about India?” I answered him truthfully, that I have never heard of anyone, from Chinese ministers to taxi drivers, talk about India. He told me that China is in Indian newspaper and industrialists’ conversation everyday.
<<So, when the world becomes bi-polar again, the only candidate to ascend to superpower status beside the U.S., is China>>
Let me suggest that should China fail to ascend to superpower (at least economically) status, the world will have failed in a grand experiment and become that much less bright.
Anecdote time. I had a meeting today with a lawyer at his office in Beijing. The office was located in a large complex. I went to a brokerage office’s public trading center in the office building after my legal meeting, out of curiosity and to sit and collect my thoughts a bit before heading to the airport.
The trading center is one of thousands, about 15,000 square feet, with electronic wall panels displaying the trading of the most heavily traded stocks. Roles of seats are placed in the middle of the hall. Trading computers are on the sides of the hall. The people there were comprised of the young, old, men, women, of all different social classes. Some folks wore no watch, some popular watch, a few fancy watches and one moon-phased equation of time machine retailing for around USD 80 grand. The stocks were falling around 5-7% today. The folks were talking, laughing, reading, looking pensive, trading, eating, and generally active.
I could not think about my issues because it was too much fun watching these folks. There were about 200 folks milling around. Yes, some of the girls were cute. My thoughts? These were the front line soldiers in the revolution. 90% of them will perish over time. The contribution of each soldier will be not at all noticeable. Their loss will be a cost to the revolution, for the greater good, never acknowledged.
The wall panels flashes the latest transaction price of retailers, appliance manufacturers, chemical companies, power generators, infrastructure investors, coal mines …
I saw the future, and it was flashing somewhere on that electronic wall panel. I edged out of the trading hall, knowing (to paraphrase Clint Eastwood) that I am the disease and there is no cure.
Chugs, Jay
P.P.S. Message to Dave and the other folks that wrote me via public postings, I tried to address all the issues raised in this single post, because I am swamped by a bunch of PMs that require individual responses. Controversy; I do not hate it:0)
To the folks that PM-ed, I will respond to every single one. |
