The article in today's Wall Street Journal regarding China Premier Wen Jiabao's implicit comments of US negligence leading to the current world financial crisis is very interesting and worth reading, but there is one part of the message that I think the paper failed to report on that should have been reported, and here it is:
鼓励区域货币金融合作，稳步推进国际货币体系多元化。(1)
"Encourage regional currency financial cooperation, stably promote international currency system pluralization."
I think the tiff that is going on between the US and China regarding holdings of US treasuries is a major issue of concern, but I do not think that we are addressing the true meaning behind China's position and their words that reflect this. This pluralization (多元化) is not about switching to Euros, Yen, and Pounds. It is about a long-term strategy for the renminbi to become the world's international currency. Inevitably this will depend on China truly stimulating domestic consumption to become the world's dominant economy, but make no mistake: Wen's comments off as much about China's long-term strategy as they do about its short-term discord.
(1) http://news.sohu.com/20090129/n261968599.shtml
Thursday, January 29, 2009
Thursday, December 4, 2008
Sarkozy and France Need to Read Between the Lines
In recent months, Sarkozy's actions regarding the Dalai Lama and also the Beijing Olympics, has created much tension between the two countries, but now the language in the Chinese press seems to be stepping up a bit in its intensity and it would be wise for the French government to appreciate the political gravity of this situation:
刘建超称，中方已经多次就欧盟轮值主席、法国领导人执意要会见达赖喇嘛一事阐述了中方的严正立场。 对于中方的立场，法方应该非常清楚。(1)
For a national press that is known in recent years for its implicit hinting at initiatives and opinions, this leaves no doubt what the message is, and we can see it in three spots in this one sentence, which roughly states that China has told the EU Chairman and French leaders repeatedly that it is not in favor of their seeing the Dalai Lama and that the French should be very aware of this.
But let's look at the language used for a moment:
已经多次 = already multiple times
中方的严正立场 = China's ardent stance
对于中方的立场，法方应该非常清楚 = regarding China's stance, France should be very clear
For me, the red flags here are the use of multiple, ardent, and very clear (in particular the 'very' in very clear). I am not suggesting that we never see strong language from the Chinese press and national spokesman, Liu Jianchao, who is quoted here. But this thorn in China's paw will not go away and they augmentation of severity in tone is a blatant sign that China is determined to rid itself forthwith of this international assault on their reputation.
All disputes of such force are simply bargaining chips in international diplomacy, and one would have to applaud France for milking this for all it is worth; in contrast, it seems as though the US has begun to move beyond the issue of the Dalai Lama. Perhaps this means that France feels they and the EU have not received enough collateral in order to drop the issue.
From a young American investor's standpoint looking at China, France and the EU arguably are simply tangential issues and do not directly affect our ability to invest profitably in China's growing economy. However, I would say just the opposite. There is much that President Obama and our leaders can continue to glean from the relationships that China has with the other major international economies, and the EU and Japan are arguably as important to China as is the US. From a human rights standpoint, I am willing to accept an ongoing debate on the Tibet issue, but from a geopolitical perspective, it is time for all players to settle up and move on.
(1) 4 December 2008 http://news.sohu.com/20081204/n261025122.shtml
刘建超称，中方已经多次就欧盟轮值主席、法国领导人执意要会见达赖喇嘛一事阐述了中方的严正立场。 对于中方的立场，法方应该非常清楚。(1)
For a national press that is known in recent years for its implicit hinting at initiatives and opinions, this leaves no doubt what the message is, and we can see it in three spots in this one sentence, which roughly states that China has told the EU Chairman and French leaders repeatedly that it is not in favor of their seeing the Dalai Lama and that the French should be very aware of this.
But let's look at the language used for a moment:
已经多次 = already multiple times
中方的严正立场 = China's ardent stance
对于中方的立场，法方应该非常清楚 = regarding China's stance, France should be very clear
For me, the red flags here are the use of multiple, ardent, and very clear (in particular the 'very' in very clear). I am not suggesting that we never see strong language from the Chinese press and national spokesman, Liu Jianchao, who is quoted here. But this thorn in China's paw will not go away and they augmentation of severity in tone is a blatant sign that China is determined to rid itself forthwith of this international assault on their reputation.
All disputes of such force are simply bargaining chips in international diplomacy, and one would have to applaud France for milking this for all it is worth; in contrast, it seems as though the US has begun to move beyond the issue of the Dalai Lama. Perhaps this means that France feels they and the EU have not received enough collateral in order to drop the issue.
From a young American investor's standpoint looking at China, France and the EU arguably are simply tangential issues and do not directly affect our ability to invest profitably in China's growing economy. However, I would say just the opposite. There is much that President Obama and our leaders can continue to glean from the relationships that China has with the other major international economies, and the EU and Japan are arguably as important to China as is the US. From a human rights standpoint, I am willing to accept an ongoing debate on the Tibet issue, but from a geopolitical perspective, it is time for all players to settle up and move on.
(1) 4 December 2008 http://news.sohu.com/20081204/n261025122.shtml
Thursday, September 25, 2008
REITs in China - how long, how long will we sing this song?
Awesome piece from Zepplin Real Estate (26 Sep 2008 http://www.real-estate-tech.com/gb2312articles/hkej486_S.htm) on the return of REITs over the long term in which he argues that REIT returns may not be as stable as otherwise believed due to fluctuations in market rents, financing, and the 90% dividend rule. Before we get in to this, understand that REITs are very new in Asia and especially Hong Kong (just 3 years old), so much background information is needed to come on market to educate prospective investors...
In late 2005, Guangzhou's city government did a sort of "backdoor" listing of several high profile real estate investments on the Hang Seng in what has been recognized as China first unofficial REIT. The launch was both engendered by and consequently triggered huge debate about the future of this industry in China. 3 years later, we still do not have a REIT industry to speak of in China and there are many reasons for this. First of all, the whole securities market is teeming with neophytes and REITs are very complex financial instruments. The ability to master their intricacies takes years. Secondly, the real estate industry as a whole was getting far to out of hand when this REIT was listed, so the government's relevant bureaus had to take considerable action in other areas of the real estate world in China. Thirdly, at about this same time, another mounumental REIT was being listed in Hong Kong. The Link REIT, as it is known, came under immense pressure from holdouts who demanded higher compensation for the land they were giving up as well as where they were moving to. Some retailers (Link is a big retail REIT) held out for a very long time and received handsome buyouts. Finally, the REIT security model ties in deeply to the general reform of the Communist Party in recent years. Since 2001 (perhaps even as early as 1998), when it became clear that China was here to stay as a market-oriented capitalistic economy, the grandeur of communism's ideals began to fade among more liberal party members and even among some staunch advocates of Maoism. So, over the last three years, especially at the 2006, 2007, and 2008 Peoples' Congresses, we have seen this debate square off in the press and we can infer that there is a polarization of the issue at the highest levels. (Personally, I think it is great because you have a new country in which the old vanguard is disgusted at the new found wealth and glory of the entrepreneur class - has all the makings for a 2-party system, but alas, I digress). In the 2007 Property Law, things really changed for the first time as the government address the issue of lease renewals for factory owners, home owners, and commercail building owners. Now what we have is a situation where you can automotically renew your lease on buidlings you own. A small negotiation with the government and proof of ownership will show the way. Inheritance is also taken into consideration. Simple fundamentals to westerners, but for the world's largest communist country, this break down has taken an exceptionally long period of time because it places individuals that to this day believe in a panacea stemming from Communism versus extremely wealthy industrialists, cadres, and more.
In late 2005, Guangzhou's city government did a sort of "backdoor" listing of several high profile real estate investments on the Hang Seng in what has been recognized as China first unofficial REIT. The launch was both engendered by and consequently triggered huge debate about the future of this industry in China. 3 years later, we still do not have a REIT industry to speak of in China and there are many reasons for this. First of all, the whole securities market is teeming with neophytes and REITs are very complex financial instruments. The ability to master their intricacies takes years. Secondly, the real estate industry as a whole was getting far to out of hand when this REIT was listed, so the government's relevant bureaus had to take considerable action in other areas of the real estate world in China. Thirdly, at about this same time, another mounumental REIT was being listed in Hong Kong. The Link REIT, as it is known, came under immense pressure from holdouts who demanded higher compensation for the land they were giving up as well as where they were moving to. Some retailers (Link is a big retail REIT) held out for a very long time and received handsome buyouts. Finally, the REIT security model ties in deeply to the general reform of the Communist Party in recent years. Since 2001 (perhaps even as early as 1998), when it became clear that China was here to stay as a market-oriented capitalistic economy, the grandeur of communism's ideals began to fade among more liberal party members and even among some staunch advocates of Maoism. So, over the last three years, especially at the 2006, 2007, and 2008 Peoples' Congresses, we have seen this debate square off in the press and we can infer that there is a polarization of the issue at the highest levels. (Personally, I think it is great because you have a new country in which the old vanguard is disgusted at the new found wealth and glory of the entrepreneur class - has all the makings for a 2-party system, but alas, I digress). In the 2007 Property Law, things really changed for the first time as the government address the issue of lease renewals for factory owners, home owners, and commercail building owners. Now what we have is a situation where you can automotically renew your lease on buidlings you own. A small negotiation with the government and proof of ownership will show the way. Inheritance is also taken into consideration. Simple fundamentals to westerners, but for the world's largest communist country, this break down has taken an exceptionally long period of time because it places individuals that to this day believe in a panacea stemming from Communism versus extremely wealthy industrialists, cadres, and more.
Friday, August 29, 2008
Summer's Gone and We're Back from China
It's been an eventful summer - May in Philadelphia, June and July in Shanghai and Beijing, and just wrapped up August in Philadelphia. Wharton-Lauder has been great so far. Let's kick off the fall by getting right into it. This past week, I saw two items of language in English and Chinese that highlighted amazing uses of colloquial language by Warren Buffett and a Chinese blogger, Cheng Shi.
Last week, Buffett, in classic form of criticizing the common Wall Street dogma showed what happens to speculators when it's time to pay the pied piper...
Speaking on Friday on CNBC television, Buffett said some housing-related businesses in his Berkshire Hathaway Inc conglomerate are struggling as the economy works off past excess in making credit available. 'You always find out who's been swimming naked when the tide goes out. We found out that Wall Street has been kind of a nudist beach,' said Buffett, who in March was called the world's richest person by Forbes magazine.(1) This English term is eerily similar to the Chinese idiom, 水落石出, one of my favorite classics, that means literaly, "Water recedes stone out." The English version, while a bit more colorful, is far less common than the Chinese version. But, what is most interesting is how they both perfectly identify the extent and shade of emotion that accompanies a financial crisis, namely, that speculators are left standing with not security at all, a plight that is ironically derived from the asset-backed securities which created the vanished wealth in the first place.
And herein lies the link to our next headline, taken from Chengshi's blog entry this week: 油价下跌：昙花一现还是趋势反转？ (2) "Oil prices fall: is it a transient flower or the reversal of a trend." 昙花一现 means fleeting, transient, or vanishing as soon as it appears. Although the author goes on to lay out his reasons for the temporary nature of oil's recent retreat, one could read into it so much more about the state of the current world credit market. Is the volatility going to settle with a decline in world oil prices, or is the damage much deeper than investors are willing to admit?
From the view in China, there is no major economic slowdown or recession in sight. As a result, that is going to continue to put massive pressure on world commodities and drive consumer price growth worldwide. The moment at hand is thus an incredible buying period for cheap blue-chip stocks, especially those that are currently experiencing unreasonable price hammering due to credit exposure. Identifying which of these are consumer monopolies and destined to survive with high return on equity ratios is our mantra for purchasing enormous long-term returns today.(1) 22 August 2008 http://biz.yahoo.com/rb/080822/buffett.html
(2) 22 August 2008 http://cheng10.blog.sohu.com/
Thursday, May 8, 2008
A Tale of Two Chinas
On back to back nights of April 28 to 29th, I attended separate talks on China that demonstrated a remarkable contrast of outlooks different interest groups have on industry in China. The first night was the latest installment of the Beijing Olympics Series put on by the Asia Society. They had some really quality speakers including Alexandra Harney, author of The China Price: The True Cost of Chinese Competitive Advantage, Paul Midler, President of China Advantage, Daniel Rosen, Principal of China Strategic Advisory, and Alan Schoem, Global Product Risk Practice at Marsh. First of all, I found their level of knowledge to be very deep, particularly Paul and Alan who waxed eloquently all night about the real challenges in China. Let me highlight a few of the issues they raised:
China makes everything, not just cheap stuff, from toys to airline parts. It's not that suppliers themselves are corrupt or skimming, but more often what happens is that they have a large network of suppliers themselves that they cannot readily police, so we have to be conscious of the whole supply chain when trying to identify problems there.
The US Consumer Products Safety Commission has about 390 employees. The equivalent body in China, the AQSAQ has 55,000!!! They are also strapped for cash and years behind the US and the EU. Moreover, the Federal Government of the US increased the budget for the Consumer Products Safety Commission to $80mm from $63 million last year, which in government budgets amounts to a huge increase.
Eventually there will be convergence in China for export and domestic quality products and that will help improve quality dramatically across the board. And, we can even see this happening today. There is a force pulling Chinese companies up the value chain and it is not just the CCP. They want their own brands now, and in order to receive marginal value for the products under those labels, Chinese companies will have to dovetail marketing with quality. Consider Haier. 10 years ago, no one in America knew this white goods maker. Now they have a substantial chunk of US market share in air conditioners and more.
Quality problems in China amount to one of two basic problems.
1: factory didn't know better - specifications mistake
2: willful corner cutting
AQSAQ can help to solve #1, but there is really little the organization can do about #2. Maybe penalties, maybe enforcement, but really very little in general.
The overriding theme of the night was that at the heart of the problem, and where the real responsibility lies is with corporations as huge as Proctor and Gamble all the way down to my business - it is with the exporters, the importers, and the factories. It is our job to make sure that quality is tested and bad product is not released.
The will is certainly there to change certain industries. For example, Mr. Schoem talked about the fireworks industry in Hunan Province, whence comes over 60% of US imported fireworks. It turns out that a number of years ago, the US Fireworks Standards American Fireworks Safety Lab was created to pemit imports of fireworks under the agreement of enforcement of stringent safety requirements. Hunan's government worked closely with the US authorities, and today, 90% AFSL-tested fireworks from China comply with mandatory standards. That compares with rates as low as 50% for compliance of similar product from other countries.
This is a nice segue into the talk on the 29th, when James Filippatos, Assistant Administrator for International Aviation at the Fedearl Aviation Administration (FAA) gave a talk at the National Council on China-US Relations. Mr. Filippatos' talk was truly a gem. He described his experiences in China with aplomb. Moreover, he introduced to me the fact that over the last four years, Chinese aircraft have had the safest record of any country in the world. He then reminded us that 15 years ago, Chinese planes were so dangerous that the US would not let them fly here. Now there arae 23 daily flights between the US and China and that number is sure to grow rapidly. The Chinese equivalent of the FAA, the CAAC, got together with the FAA to make this all possible. They emphasized that no matter what, the Chinese market needed better pilots, airplanes, and operational know-how. According to Mr. Filippatos, this is an unprecedented success story for the FAA and CAAC. The two bodies have trained hundreds of personnel and generally instilled a desire to constantly improve. We reap the benefits of that improvement every day.
Quick fact - one of the major factors deterring the expansion of its domestic commercial flight industry is that China's military controls 80% of the skies in China. The US equivlent is may 2 - 3$%. Wow - that negotiation is going to be a very long process. D
Moreover,
China makes everything, not just cheap stuff, from toys to airline parts. It's not that suppliers themselves are corrupt or skimming, but more often what happens is that they have a large network of suppliers themselves that they cannot readily police, so we have to be conscious of the whole supply chain when trying to identify problems there.
The US Consumer Products Safety Commission has about 390 employees. The equivalent body in China, the AQSAQ has 55,000!!! They are also strapped for cash and years behind the US and the EU. Moreover, the Federal Government of the US increased the budget for the Consumer Products Safety Commission to $80mm from $63 million last year, which in government budgets amounts to a huge increase.
Eventually there will be convergence in China for export and domestic quality products and that will help improve quality dramatically across the board. And, we can even see this happening today. There is a force pulling Chinese companies up the value chain and it is not just the CCP. They want their own brands now, and in order to receive marginal value for the products under those labels, Chinese companies will have to dovetail marketing with quality. Consider Haier. 10 years ago, no one in America knew this white goods maker. Now they have a substantial chunk of US market share in air conditioners and more.
Quality problems in China amount to one of two basic problems.
1: factory didn't know better - specifications mistake
2: willful corner cutting
AQSAQ can help to solve #1, but there is really little the organization can do about #2. Maybe penalties, maybe enforcement, but really very little in general.
The overriding theme of the night was that at the heart of the problem, and where the real responsibility lies is with corporations as huge as Proctor and Gamble all the way down to my business - it is with the exporters, the importers, and the factories. It is our job to make sure that quality is tested and bad product is not released.
The will is certainly there to change certain industries. For example, Mr. Schoem talked about the fireworks industry in Hunan Province, whence comes over 60% of US imported fireworks. It turns out that a number of years ago, the US Fireworks Standards American Fireworks Safety Lab was created to pemit imports of fireworks under the agreement of enforcement of stringent safety requirements. Hunan's government worked closely with the US authorities, and today, 90% AFSL-tested fireworks from China comply with mandatory standards. That compares with rates as low as 50% for compliance of similar product from other countries.
This is a nice segue into the talk on the 29th, when James Filippatos, Assistant Administrator for International Aviation at the Fedearl Aviation Administration (FAA) gave a talk at the National Council on China-US Relations. Mr. Filippatos' talk was truly a gem. He described his experiences in China with aplomb. Moreover, he introduced to me the fact that over the last four years, Chinese aircraft have had the safest record of any country in the world. He then reminded us that 15 years ago, Chinese planes were so dangerous that the US would not let them fly here. Now there arae 23 daily flights between the US and China and that number is sure to grow rapidly. The Chinese equivalent of the FAA, the CAAC, got together with the FAA to make this all possible. They emphasized that no matter what, the Chinese market needed better pilots, airplanes, and operational know-how. According to Mr. Filippatos, this is an unprecedented success story for the FAA and CAAC. The two bodies have trained hundreds of personnel and generally instilled a desire to constantly improve. We reap the benefits of that improvement every day.
Quick fact - one of the major factors deterring the expansion of its domestic commercial flight industry is that China's military controls 80% of the skies in China. The US equivlent is may 2 - 3$%. Wow - that negotiation is going to be a very long process. D
Moreover,
Wednesday, April 23, 2008
Blood in the Streets
I saw this in the Shanghai Daily yesterday and realized that it's official: there is now blood in the streets all over Western Europe and the US in terms of the property sector:
"Spanish builders are tempting reluctant home buyers with free cars, mortgage holidays and hard cash as they try to lift the crisis-hit housing sector. Some are also diving into the rental market. At this month's annual property fair in Madrid, the number of promoters was down by a third on the previous year, many of them victims of the deepening housing crisis. With fewer buyers milling between models of white-washed housing estates, there were scant queues to see sales representatives." [1]
The question is, why did this appear in the Shanghai Daily? The answer: propaganda. The regulators in China have continued to put enormous pressure on the property sector and as a result, they need to be able to justify their actions. One way to do that successfully is to point the finger at the alternative, which conveniently is much worse right now. In fact, this is great for the government as they take aim at developers and buyers alike in a common chorus, "Slow down."
[1] April 24, 2008 Harding, Ben and Clara Vilar, Copyright Shanghai Daily Information Network
"Spanish builders are tempting reluctant home buyers with free cars, mortgage holidays and hard cash as they try to lift the crisis-hit housing sector. Some are also diving into the rental market. At this month's annual property fair in Madrid, the number of promoters was down by a third on the previous year, many of them victims of the deepening housing crisis. With fewer buyers milling between models of white-washed housing estates, there were scant queues to see sales representatives." [1]
The question is, why did this appear in the Shanghai Daily? The answer: propaganda. The regulators in China have continued to put enormous pressure on the property sector and as a result, they need to be able to justify their actions. One way to do that successfully is to point the finger at the alternative, which conveniently is much worse right now. In fact, this is great for the government as they take aim at developers and buyers alike in a common chorus, "Slow down."
[1] April 24, 2008 Harding, Ben and Clara Vilar, Copyright Shanghai Daily Information Network
Friday, April 18, 2008
Lobbying in China
Scott Kennedy's 2005 "The Business of Lobbying in China" is interesting. It's one of those books that is extremely exciting at the beginning as he breaks down how major corporations lobby in Beijing and get together in some instances but often times point the same finger at each other. However, at one point, he is so unsuccesful in keeping the reader involved because he gets so caught up in the names, functions, and history of China's major commercial associations, such as the SELA, PEA, CTVEA, ACFIC, MOFERT, and many others. Nevertheless, there are some interesting revelations, such as the fact that ACFIC, a non-profit organization, publishes the China Business Times. Also interesting was that the roots of the current associations system emerged out of the Mao era, which seems strange given the fact that these are very commercial bodies today. Back at the very beginning of Maoist China (early 1950s), being private was acceptable, however as time passed of course it became terribly taboo. Consequently, many of the associations that were built on private businesses shut down or suspended operations until the late 1980s.
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