Prepare for the Future
By Lawrence Roulston
Jan 7 2003
Taken from the December 30th issue of Resource Opportunities
Many people in the Western world are only beginning to see evidence of the huge change that is
about to sweep across our lives. I have just finished the most extraordinary trip that I have ever
experienced, and that is a big statement considering that I spend half of my time traveling. In the
past few years, I have been all over North America and visited parts of South America, Eastern
Europe, Western Europe, Africa, the Middle East and Asia.
I thought that I was prepared for this trip. I read a lot about China and a good friend has given
numerous firsthand accounts following his trips over there. Yet, in spite of that general
knowledge, I was truly blown away when I saw China. Every one of the preconceived notions
about China held by western investors proved to be completely out of date.
The statistics should tell the story: China is now the world's largest recipient of foreign direct
investment. This year, this one country will capture 10% of all of the foreign direct investment in
the world. The economy has been growing at a steady 7% plus per annum and that pace of
growth is forecast to continue for the next 20 years or more.
It's easy enough to say (and I did before coming here), that the economic miracle now underway
could burst like a balloon, as it did in Southeast Asia in 1997. Don't just take it from me.
Planeloads of corporate executives from every corner of the world are coming to China to see it
firsthand. After they get home and report to their boards of directors, the checks are written very
quickly. Evidence of the enormous amount of investment capital flowing into China can be seen in
every part of the country. Those dollars (and Euro, pounds, yen and every other currency) are
building roads, factories and other hard assets that are helping to industrialize a nation of one
and a quarter billion people. More people are constantly joining the already vast consuming
middle class.
I could write a book on what I saw on this trip, but I will try to paint a picture in the next few
paragraphs that will hopefully dispel the out of date notions that most investors have of China. My
trip gave me a sample of the northeast, the southwest and Shanghai. The itinerary was organized
around seeing several of the mining projects of two North American-based companies. The
projects were exceptional, and are detailed in the company section of this issue. I have also
included a section of Frequently Asked Questions and a collections of quotes from the Chinese
newspapers to give a better feel for what is happening in this country.
At this moment, I am sitting in a near-new Boeing 737-700, traveling from Kunming in southern
China to Shanghai. There's only one other western face on this full plane. The airline is one of
several regional airline companies in China, the largest of which trades on the New York Stock
Exchange.
Kunming is a city of about 2 million people, and is the capital of one of the poorest of China’s 30
provinces. It is a beautiful city, in the foothills of the Himalaya Mountains. I stayed in the Kai Wah
Plaza Hotel, owned by a private Chinese investor. My room, on the 32nd floor of the 40 story main
tower, was at least on a par with a deluxe room in the big name chains. North American hotels
can only dream of delivering anything close to the service of the Chinese hotels.
From my room, I looked out at the Himalayas, only about 20 kilometers away. Nearby was a
mountain range of skyscrapers, typically 20 to 30 stories – a collection of offices, hotels and
apartments. They were unlike North American high rises, which are often dull in design. Most
Chinese skyscrapers incorporate design features that make them far more appealing: curves,
arches, spirals and subtle complexity in their lines.
Within a few blocks of the Kunming hotel, you can see stores that specialize in Gucci, Armani,
Ralph Lauren and all the other luxury brands, at prices similar to North America. These are real.
The knockoffs are sold in the back-street markets that start a few blocks away.
Jewelry stores abound, with gorgeous collections of gold, diamonds, and jade. White gold (an
alloy with silver) is more common than yellow gold. Platinum is coveted, but it is harder to find
than white gold, even though China is now the world's largest consumer of platinum jewelry. If you
think these luxury goods are here for the foreign tourists, you need to have a closer look. There
are very few white faces in this part of China. The shops are completely filled with locals or
tourists from other parts of China.
Cell phones are extremely popular in China, with a massive 160 million handsets now in use.
Within a block of the hotel, there were two shops, of at least a thousand square feet each, selling
nothing but cell phones. There were literally dozens of models, all designer styles, loaded with
features. (I was embarrassed to notice that not one phone in the store was as large as my phone,
which I thought was pretty compact, or as ugly.) By the way, the prices for handsets and airtime
are comparable to North American prices, with some models running in excess of a thousand
dollars.
Some people have the mistaken notion that cell phones are popular because the hard-wired
phones are hard to come by. The reality is that many people have a cell in addition to the land-line
because they simply want to be in constant contact with friends and business associates.
When I arrived at the hotel in Shenyang on the first night in China, I asked my Chinese host for
help to connect my laptop to the internet. Expecting a long, complicated procedure, or an
explanation of why it couldn’t be done here, I was surprised when he replied simply: "In this area
you dial 169." "But what about a user id, and a password?" "Oh, those are 169 and 169." It wasn’t
until he demonstrated that I was convinced. Everyone in that area could simply dial a 3 digit phone
number and use the same digits for id and password to access the internet. Each area has its
own 3 digit code.
This virtually free internet accesses only Chinese websites. Connecting to the rest of the world
requires going through a pay service, which is readily available. In fact, in nearly every place I had
ready access to broadband internet.
My tour included a large copper smelter-refinery complex in Kunming, which uses the latest
smelting technology. It was built in less than two years from signing the technology licensing
agreement to pouring copper. The complex was built by a local contractor, with most of the
components sourced locally. A couple of months after startup, it was operating above design
capacity. Next year, the second year of operations, the operators expect to produce nearly 25%
more than design capacity from the plant.
Cross another mis-perception off the list: That massive smelter complex, like many of the modern
new factories being built across China, is operated by two or three highly trained engineers sitting
in front of computer consoles.
One of the property tours involved a two hour drive through the Chinese countryside. The Chinese
hosts looked embarrassed, and reminded me that Yunnan is the poorest of China's provinces. I
told them that these farms and villages were far better off than much of the countryside in Latin
America, the Middle East or Africa. All of the houses have electric lights and televisions. The
government’s immediate objective now is to get color televisions and refrigerators into every
house in the country.
A massive initiative is now underway to tie every village into a nation-wide power grid. The huge
Three Gorges project is now delivering cheap hydroelectric power to the grid. Three more
massive hydroelectric projects on nearly the same scale are already underway.
Bicycles are still an important part of urban transport. A special lane, often partitioned from the
main traffic flow, carries a steady stream of two wheelers. At the same time, two or three lanes in
each direction carry cars and trucks. The traffic includes many inexpensive local cars. At the same
time, the proportion of expensive luxury cars is comparable to most American cities.
I experienced many hundreds of kilometers of some of the best freeways that I have seen
anywhere, including California. China now has 19,000 kilometers of freeways, of which 8,000
kilometers was finished in the last year. Only one country in the world has more freeways. The
torrid pace of road building in China continues, meaning that China may soon overtake the U.S.
as the world freeway leader.
The Chinese freeways are first class. Enormous bridges and tunnels make it feel like you're
driving straight through mountain ranges, which in effect is what you are doing. Many of the roads
have been carved into the lower slopes of hillsides so that they don't interfere with the agricultural
land along the valley floors. Road cuts have beautiful patterns of rocks and landscaping.
China is, and always has been, a land of entrepreneurs. There are literally millions of small
privately owned businesses that operate throughout the country. A growing number of these
companies are publicly traded. I was definitely not prepared for the proliferation of securities
firms. For example, I was surprised to see a 15 story office building in the northern city of
Shenyang named for its biggest tenant, a local securities firm.
The distinction between government and private ownership is sometimes blurred, and even the
sophisticated local business people and investment analysts that I talked with on the trip have
some difficulty sometimes in explaining the distinctions.
Although ownership is sometimes complicated, many companies from around the world have
gained a high comfort level with the system, judging by the massive amounts of money from all
over the world that is pouring into China.
The proliferation of billion dollar companies that are now an important factor in the Chinese
economy have originated from a couple of directions. Many small privately owned companies
have grown rapidly in this fertile economic environment. Direct investments from foreign firms and
joint ventures have contributed a great deal of capital to help these companies to grow rapidly.
At the same time, government owned companies are migrating more and more toward
public-traded companies. I gained some insight into the process, in part when I had the good
fortune to attend a small banquet. The two dozen people present included a provincial governor
and the chairman and some senior executives of one of the largest of the government owned
corporations. That huge corporation has established a base of operations in Hong Kong, and has
listed four subsidiaries on the Hong Kong Stock exchange. Some senior executives of that Hong
Kong group explained that this evolution toward publicly-traded companies is an important part of
the Chinese economic model.
New money is being raised for the state-owned companies through the public markets, from
direct investments and by way of joint ventures. There is no shortage of investment money
worldwide looking for a home in China, and there’s a deal available to suit any taste. It is still very
important to know how to work within the system, as the local players want to be sure that they get
the best deal they can. Culture and language barriers add to the complexity.
Corruption is still an issue, but even that is changing rapidly. An increasing number of
government and private sector bad guys are going to jail, with the worst offenders being executed.
While there is still petty corruption in the country, it is mild compared to many developing
countries, and there is no fraud on the level of Enron or WorldCom.
Nobody in the country goes hungry and hundreds of millions of people are moving quickly
towards, or are already part of, what is already one of the largest middle-classes in the world.
The country is building a very strong infrastructure, based on the legendary Asian practice of
planning for the future with a long-term perspective. China has the luxury of applying the best
technologies available anywhere in the world. Often, the best features of several systems are
combined and then improved on.
An important part of the Chinese success rests with the educational system. Virtually every child
in the country goes to school, with a high proportion getting through at least grade 9. After that,
they divide into a pre-university program and a technical school-oriented program. Competition for
the pre-university spots is intense. One of my hosts explained that his grade nine son leaves for
school at 6:10 in the morning, and returns home at 8:30 in the evening. The competition carries
through, to get into the best schools and the best programs in the universities.
In essence, the Chinese system selects the brightest minds from a talent pool of one and a
quarter billion people and gives those leading students exposure to a first-rate educational
system.
Flying into Shanghai, we're passing low over a rural area that is gradually being taken over by
residential developments that look pretty much like any large North American city, with big
neighborhoods of two and three story single detached houses. Closer to the center, huge
apartment and condo complexes dominate the skyline. The city center is a mass of skyscrapers
comparable to the largest cities in the world.
The network of smartly designed freeways makes it easy to get in and around the city. Traffic bogs
down through a tunnel under the river that divides the downtown core. The congestion won’t last
long, as construction is already underway on two additional crossings that will add to the five now
in place.
Before Shanghai, I saw four other cities of more than a million people. While those cities should
have prepared me, I was still astounded by Shanghai. The drive from the domestic airport took us
into the heart of a mass of skyscrapers, all new, with construction cranes still protruding from
partly finished buildings in every direction..
My hotel room was on the 77th floor, and there were 11 floors above that. This is now the third
highest building in the world. The suite is extraordinary, in terms of its elegant style, the quality
and the technology. A broadband internet connection took only a few seconds to set up.
My view, in two directions, takes in a cityscape comparable to Manhattan. The extraordinary part of
this scene is that most of this massive international financial center was constructed in the last
five years. Every building has a unique and interesting design, and no expense was spared to
make the buildings attractive.
It is hard to imagine the extraordinary effort of planning, finance, engineering and construction that
built a modern city comparable to others that took 40 or 50 years to construct. The astounding
thing is that this pace of growth is continuing. Construction cranes still dominate the skyline, in
the city center as well as the massive condo complexes that continue for miles into the
countryside. The construction continues at the same pace around the clock, seven days a week.
These apartments and condominiums are not the sterile concrete blocks that one associates
with the urban sprawl of developing nations. I had the opportunity to visit the home of a senior
engineer for a small, privately owned mining company. The 3,800 unit complex boasts a luxurious
Club, featuring swimming pools, tennis courts, indoor badminton, health spa, library, and
numerous other amenities. Prices for a two-bedroom unit in this complex range from
US$300,000 to US$680,000.
The developments sold out almost immediately as each phase came onto the market. That
complex is typical of developments close to the city center. Prices are a little more modest further
out, but still in line with North American cities. Many, if not most, of the units in these massive
developments are owned by local professionals and business people.
Shanghai also has some extraordinary tourist sites, which I saw very briefly. I can’t wait to return at
a time when I can be a tourist. It was surprising to see throngs of tourists, literally tens of
thousands of people in several fabulous sites over a day and a half, with only a few tens of
Western faces. These tourist sites are full of Chinese tourists, snapping photos and buying
souvenirs. A massive 3-storey toy store on Nanjing Lu would have excited my six-year old son
even more than Toys-R-Us at home.
In just a few years, Shanghai has become the leading financial center of the Orient. Shanghai is
an extraordinary success, but is only a part of the Chinese economic miracle.
More than any other developing country that I have seen, things work in China, and in fact work
very well. Traffic in the big cities is heavy, but moves smoothly on intelligently designed road
systems. I saw none of the gridlock that is synonymous with most big cities in the developing
world (or the developed world, for that matter).
The economy in China is forecast to continue to grow at the current 7% annual pace for at least
the next 20 years, which will place China behind only the U.S. and Japan. It is easy to
comprehend that pace of growth continuing indefinitely. In fact, it is hard to imagine that anything
could slow it down. The country is developing a well designed and coordinated infrastructure that
will provide a solid basis for growth well into the future.
This issue includes a section of Frequently Asked Questions about China, and some brief
passages from mainly Chinese newspapers to illustrate some of the points introduced above.
In the company section of this issue, I discussed some of the companies involved in the
economic miracle of China. The focus of my trip was visiting mining and exploration projects. First
and foremost, these are well-run companies, with superb projects. They also provide an excellent
means of participating in the Chinese economic miracle.
Frequently Asked Questions About China
What about human rights?
I raised this question numerous times with various groups in the country. Once, seated in a tea
house in the midst of a popular tourist site in Shanghai, I asked that question of my host, a
Chinese national who now divides his time between China and North America. He simply waved
his arms at the literally thousands of tourists, nearly all locals, who were happily snapping photos
and buying souvenirs. These people clearly had no human rights issues on their minds. People
living in China, quite frankly, find this topic a joke. The country has gone through dramatic
changes in the past few years, and notions that originated several years ago are now completely
out of date. It may be some time yet before the Chinese attain the level of freedom that we take for
granted in the West, but the changes that have already occurred are far beyond what the
protesters hoped for in the 1980’s, and the country continues to evolve at a dramatic pace.
Is there potential for political conflict?
Everybody in China is enjoying a steadily improving standard of living. The constraints on
personal freedom that existed a few years ago have been largely eliminated. People now are far
more concerned with making money (and enjoying it!) than they are about politics.
What about property rights?
Most Chinese now own their homes. Many people in rural areas have 70 or 90 year leases rather
than direct title, but that is largely a function of making it possible for people with little wealth or
income to buy the property. Billions of dollars of foreign investment pouring into the country
confirms that title to real property is secure.
Will mining companies have secure title to their mineral properties?
The Chinese government sent a team to Vancouver to study the Canadian mineral title system.
They implemented a system that has all the safeguards for mining companies, but less of the
bureaucracy. Anybody, including foreign firms, can stake mineral rights, and have the same
protection as in any country. Many of the deals are done through joint ventures with government
owned geological bureaus in order to reap the benefits of the work already done by the bureaus.
These deals are as good as a joint venture agreement in any country.
Is it easy for Western companies to do business in China?
Yes and no. A Western company that simply waltzes in and expects to do business in China like
they would at home is destined to be frustrated beyond belief. First, language is a major barrier.
The cultural gulf is nearly as wide. It is imperative to work with a Chinese partner. Even more than
in most cultures, contacts are vital to success. Chinese companies and government agencies
are clamoring for investments. The key to success is to have an ally that allows the Western
company to work within the Chinese system.
How difficult is it to get permits to mine?
The government is very interested in seeing mining projects move forward quickly. The
government is very anxious to replace imported metals with domestic production. Turnaround
time on permits is now faster than most Western countries. Companies must meet
environmental standards in line with the developed countries, but once they have established
their willingness to comply with these standards, permits are delivered quickly, allowing projects
move ahead on a timely basis. Eco-protesters are not allowed to interfere with the desire to create
jobs in the country.
Is trained labor available?
Absolutely. China has a well-developed mining industry. There are a large number of highly
qualified geologists and a large pool of trained mine workers.
Will mining companies receive a fair price for the metals they produce in China?
Yes. As part of the World Trade Organization, all commodities in China are traded at prevailing
world prices in a free market environment.
Can foreign mining companies repatriate profits?
The only restriction on repatriating profits is that a company must have audited financial
statements to confirm that income taxes have been paid before the company can pay a dividend.
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