Kane's China Investment & Trade Blog

中国低碳生活向前进展

2009-10-29T07:38:00.000-07:00

低碳生活03年出现在国际平台之前，可持续发展学说早在90年代开始不断地主张人类应当跳出单纯追求经济增长，放弃生态环保传统发展模式。人类首要的责任就是发展高新技术，实行清洁生产和文明消费，也把当代和后代人的需要一体化，成正比。最后平衡起来社会，经济，和环境各方面。 (1) 2003 年英国政府发表了《能源白皮书》，题目是: 国家怎么做有效地创建低碳经济，首次介绍了“低碳经济”理念, 也同时引起了国际社会的广阔重视。英国政府为低碳经济发展设立了一个耀眼的目标: 2010 年二氧化碳排放量在1990 年标准上减少20%, 到2050 年减少60%, 到2050 年建立低碳经济社会。通过此新的发展趋势，英国不仅把目标锁定在减少温室气体排放所做努力的结果,也投入了很多财力和静了以便显示低碳经济是经济发展、能源消费以及人类生活方式的一种演变, 也将把扎根在化石燃料能耗基础之上的现代工业社会, 转向绿色，生态经济和文明。“因此, 系统探讨低碳经济的内涵和外延, 研究低碳经济对人类经济社会发展的影响, 既有理论价值, 也有现实意义。” (2) 面临着这么大的发展挑战，该怎么办呢？可持续发展，低碳经济都取决于三方面的合作：公司，政府，和所谓无形之手。

政府：

过去，沈阳市是中国污染严重的中型城市。沈阳大气层中颗粒物和二氧化硫浓度高。因为沈阳市政府，环保局对这一潜在的危害十分重视，对各种不同类型的污染，分别采取果断措施，进行综合治理。(3) 结果是问题在短短数年内被解决。通过此例子，毋庸置疑的是政府所面临的战略性挑战具备广泛的效应，而且平时政府就是经济发展模式的主动力量。拿美国政府为例 – 其实施的“旧车换现金补贴计划“不仅仅促进了消费者换淘汰耗油车购买节能新车，（通过4500美元的补贴）按照沃顿商学院管理学教授约翰-保罗-麦克杜飞（John Paul MacDuffie）所说的，政策为了纳税人也提供了不错的投资回报。但是，世上没有免费的午餐，而麦克杜飞补充说，“不过，这轮金融危机和日益增长的高校节能需求正在给市场带来巨大变化，全球汽车工业—尤其是通用与丰田两大公司—要想适应这种变化。还有很多准备工作要做。” (4)

公司：

不管是私营企业还是国营企业，营业在资本主义格局下的公司都必须即增强生产效率，又同时降低成本。按照低碳经济理论来说，资本主义的新发展模式重中之重就是消耗缩小。现代的经济之中有各种各样的低碳生活的旗舰产品，但是，最近亚马逊所上市的Kindle电子书可能是低碳生活的导火线…”沃顿商学院营销学教授埃里克-布莱特劳（Eric T. Bradlow）说。’现在，生产的边际成本为零，库存也为零。。。无论是Kindle电子书，还是文字印刷，上述案例里的新技术，大大增加了我们接触书籍内容的机会。。。对于消费者来说，购买和阅读图书的新方式—以及新的定价点—都是全新的领域。’” (5)

无形之手:

无形的手的意思就是在资本主义的经济之下提供供应和需求的平衡。可惜的是现在，在替代能源的领域下，无形的手越来越失效。拿光伏行业举例： “光伏产业的发展一直在不断变化。过去一年多来生产厂家担忧的因素也在改变：虽然在目前的经济环境下最令人担忧的是信贷紧缩，带就在一年前情况还非常不同。当时制约光伏产业发展的不只是潜在买家缺乏购买资金，而是生产商甚至买不到制造光伏组件的原材料硅。在德国和西班牙等地，由于政府提供丰厚的补贴，太阳能技术已经逐步开始推广。但据在纽约上市的天合光能董事长兼CEO高纪凡回忆称，就在两年前多晶硅的供给只能满足光伏组件制造商二三成的需求。更多的光伏组件制造商不得不争抢稀缺的原材料，导致原材料价格走高，终端产品（光伏组件）价格暴涨.” (6)

在中国，风力的市场也面临同样的挑战。据中国风能协会副理事长施鹏飞说：“风电投资不是有过热迹象，而是已经过热了。” (7) 具有说服力的数据显示中国的风力市场从2006年到2009年，整条产业链每年发展速度超过100%. (8) 可见的是，虽然替代能源丰富了老百姓的生活，但是因为市场的商业周期不断地经历着各种动荡，所以其发展势头老是跟随着不均匀的道路。世界上的人口总量日益增加，繁荣经济的受益人范围日益扩大，老百姓生活水平的大幅度上升有目共睹，可是如果政府和企业界不共同努力，不共同找出嵌新的发展模式，那么我们目前珍惜的低碳经济发展格局快要被消失。

(1) 环境保护与绿色营销，标准汉语教程（中级第四册），上海教育出版社，上海，150.
(2) 鲍健强, 苗阳, 陈锋, “低碳经济: 人类经济发展方式的新变革,” 浙江工业大学政治与公共管理学院, 浙江杭州, 2008年4月
(3) Mickel, Stanley, “Reading Chinese Newspapers: Tactics and Skills”, New Haven: Yale University Far Eastern Publications, 1995, 62.
(4) “旧车换现金计划能否让美国汽车工业重现生机”, 沃顿知识在线，9/2/2009.
(5) 技术的演变引发出版业的革命”, 沃顿知识在线，9/2/2009.
(6) 中国太阳能企业苦寻生存之道”, 沃顿知识在线，3/2/2009.
(7) World Journal, 2009.
(8) Ibid.

中国股市暴涨具历史性的意义

2009-08-08T23:33:00.000-07:00

“为缓解市场人士对政策转向的担忧，国家发改委、财政部、央行三部委高官周五集体亮相并表态：当前宏观政策取向不会改变，将继续保证资本市场稳定发展。"(1)

作为西方的业余观察者，我针对中国股市最近暴涨的动态将试一试从西方股市历史的角度来分析其历史性的突破。为什么用“突破”这个词呢，的确是十分值得注意的。因为，中国这次股市暴涨不仅仅因为在三年内猛暴了两次，也该说是因为第二次跟着第21世纪第一次萧条。全球的资本市场压倒性绝大多数的业内人士不否认世界的经济复苏很大程度上来源于中国注资政策的有效实行及其奇迹性的成功。上面发改委所宣传毫无含义，政府没有任何缓解股市的猛涨。

值得一提的是1933美国大萧条已经延续不到四年股市就达到了低谷，总值下了90%。德国的债务市场进入了地狱。去年下半年的幅度远远比50年以来的经济衰退大。中国俗语说“身在庐山中，反不知庐山真面目”，可是六个月前，股市，甚者全经济无可置疑倾向于历史性的大跌，连一年内跌60%的可能性也无可去除。现在不仅中国股市本身大大增增，世界各地也慢慢回到健康的状态。

作为西方的观察者，我也该尽量试图多从中国本国的角度来分析。中国政府在此批注资拯救市场的措施中有两点值得我们学习：一是低价买入；二是鉴于“中国人民储蓄共和国”的国际地位愈来愈举足轻重，新兴国家看机会时，都该趁热打铁。中国早在01年入WTO的时候等着同类的商机来拿出一比巨大国资来买入国际金融市场，也同时积累其国际政治影响。如果用中国国家统计局的数字作为证据表明：中国最近的A股市场投资规模远远比06年之前大。其实06年中国A股市场的总量比05年风暴了几倍，标志着中国股市成熟下一阶段的导火线（看下面的图表1）。如果我们把中国股市最近10年的走势跟同期的中国房地产的投资做出对比（看下面的图表2），不可否认的是，房地产的投资更具周期性，增长格局很稳定。到了06年，中国股市虽然没有地产市场稳定，可该承认是其走势的相当稳定性。只不过，从06年开始，中国股市总量的暴增与其不可预料的波动幅度搭配打下了经商炼金的最初基础。

果然，西方观察者都以为中国国内生产总值的3万亿美元意味着中国经济只有美国经济总规模的1/4，但是中国通过此次注资项目信心十足地表示：按购买力两国的经济规模更接近。曾任好佛大学肯尼迪政府学院院长的约瑟夫-耐在其2008年出版的有理论性的书“领导的能力”，耐教授解释他对领导能力的“软实力、硬实力”的概念。“最后”耐说“还有一种能力比软实力和硬实力还要重要，那就是见机行事的能力，能够恰到好处地处理事情，作出决定。”（2）财政部副部长丁学东公开宣布， “下一步，财政部将继续配合有关部门健全和完善市场内在稳定机制，以保证资本市场，特别是股市稳定健康发展。”（1）意思是中国政府不将停止打下资本市场的第二层面，而作为等到市场跌到最低的波谷时的最大的投资者，中国政府本身就在显着股神的行为；幸会有中国，否则全球经济毫无机会来复苏的多么快！

图表1 - 中国交换总值:沪市A股（RMB）（3）

年交换总值
1995 304264.3
1996 930387.3
1997 1355025
1998 1230423
1999 1682630
2000 3102970
2001 1987684
2002 1644171
2003 2054125
2004 2622931
2005 1906149
2006 5724509
2007 30196028
2008 17976243
2009上半 16163417

图表2 - 中国房地产总投资额（RMB)(3)

1995 315152
1996 321644
1997 317837
1998 361423
1999 410320
2000 498405
2001 634411
2002 779092
2003 1015380
2004 1315825
2005 1590925
2006 1942292
2007 2528884
2008 3057982

（1）上海证券报 in 三部委：政策不变保股市稳定 http://business.sohu.com/20090809/n265816323.shtml August 9, 2009
（2） “领导的能力” （The Powers to Lead, Oxford Press, 2008)
（3） CEIC Data

Lynch's Ideas Today 林奇的意见无可被烧毁

2009-07-08T23:27:00.000-07:00

最近我翻过几页彼得林奇所写的《战胜华尔街》本书，特别值得一提的就是下一段：

”当时（1992年1月）不少大盘股，尤其是市场上人人皆知的成长性公司，如菲利普-莫里斯，雅培，沃尔玛，百时美公司等，股价上涨幅度明显超过了公司盈利水平，从股价走势图上看，股价线远远高于收益线，这是一个十分不好的信号。》（战胜华尔街美林奇（Lynch, P.）,(美)罗瑟查尔德(Rothchild, J.）著；刘建位等译：机械工业出版社，2007.8）。

与其相比，美国股市的现状恰恰相反从股价大跌的困境不断得崛起，从而面临着股价上涨幅度明显落后于公司盈利水平。对于集中投资组合的高明投资者、选股者来讲，目前就是有史以来十分罕见的商机。

High Inflation

2009-06-30T01:05:00.000-07:00

I was discussing college loan rates with a friend yesterday. He told me that not only has our loan provider thrown a 5.5-pt swing at us from last year to this year, but what's worse - they could potentially skyrocket with inflation if we keep them variable, which would suggest assuming a fixed rate instead of the current variable.

That got me thinking about the high inflation eras of the past and instead of wondering why this might happen, or what circumstances might cause such an environment, I would like to focus on the rumblings that I have been hearing from colleagues discussing the negative impact this could have on China.

First of all, China's monetary and foreign currency authorities are much savvier than we are giving them credit for, and I think that years ago they understood the feasibility of this type of predicament. And while I do believe the the problem is very big, it is still not a devastating blow to either the economy in China or the US-China relationship.

But here is where it could get very interesting. Although pension funds have always aggressively chosen to invest in primarily fixed-income assets, I tend to think that a sovereign wealth fund like the one China has can be slightly more aggressive than other such organizations and hence be in a position to purchase AA and above-rated bonds if they were to climb to 10+%.

Oh wait, this just in - our ratings agencies have no credibility either and China surely will not trust them any time soon.

"

Wen's Signals from Davos

2009-01-29T09:07:00.001-08:00

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

Sarkozy and France Need to Read Between the Lines

2008-12-04T08:29:00.000-08:00

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

REITs in China - how long, how long will we sing this song?

2008-09-25T21:05:00.000-07:00

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.

Summer's Gone and We're Back from China

2008-08-29T15:45:00.000-07:00

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/

A Tale of Two Chinas

2008-05-08T22:34:00.000-07:00

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,

Blood in the Streets

2008-04-23T11:46:00.000-07:00

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

Lobbying in China

2008-04-18T03:05:00.000-07:00

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.

Asia Society Meeting on Carbon Trading

2008-04-08T12:00:00.000-07:00

Last night (4/7/08) at the Asia Society in New York City (70th St/Park Avenue), there was a terrific talk entitled "Carbon Trading Update: Business Opportunities for Asian Sustainable Infrastructure".

The main point of the talk was laid out early on by moderator Jon A. Anda, President, Environmental Markets Network and a trustee for the Asia Society (also a former Vice-Chair at Morgan Stanley).

Mr. Anda went through some basic background of the last several years that the carbon trading market has been around. He said that:

-Efficient CO2 mkt enables an efficient dynamic hedge of climate risk

-We don't have the tools yet to hedge the risk of BAD climate changes - the technological "tools" are simply not there yet

-We must limit quantities because you simply cannot tell people to "stop using carbon" and then just tax them more, for it will turn out like the cigarettes epidemic, where smokers just keep smoking and paying the higher taxes

If the US went to 80% reduction (70% by Senate) off its current usage ('08), the EU: 60% off it's 1990 usage (Merkel), and China 35% off its projected 2012 usage totals, then we would have an industry of hundreds of billions of dollars indeed possibly trillions.

And continued with the goals of the discussion, specifically to answer the following:

Carbon Trading: Is it a Good Idea?
Carbon Trading: Can it work?
Carbon Trading: Does it have a chance of being adopted in the US and then globally?

It was my general feeling that the panel of four that Mr. Anda moderated all answered yes to those three questions in one form or another.

First, a couple of definitions that I had no knowledge of going into the evening:

CCS - Carbon Capture and Storage - (from Wikipedia) Carbon capture and storage (CCS) is an approach to mitigate global warming by capturing carbon dioxide (CO₂) from large point sources such as fossil fuel power plants and storing it instead of releasing it into the atmosphere. Technology for large scale capture of CO₂ is already commercially available and fairly well developed. Although CO₂ has been injected into geological formations for various purposes, the long term storage of CO₂ is a relatively untried concept and as yet (2007) no large scale power plant operates with a full carbon capture and storage system.

CDM - The Clean Development Mechanism - an arrangement under the Kyoto Protocol allowing industrialised countries with a greenhouse gas reduction commitment (called Annex 1 countries) to invest in projects that reduce emissions in developing countries as an alternative to more expensive emission reductions in their own countries. A crucial feature of an approved CDM carbon credit is that it has established that the planned reductions would not occur without the additional incentive provided by emission reductions credits, a concept known as "additionality". (Wikipedia)

The panel was awesome. It featured:

Paul Ezekiel, Head of Global Carbon Trading, Credit Suisse
Peter Ho, Country Director, China, EcoSecurities
Timothy Profeta, Director, Nicholas Institute for Environmental Policy Solutions (@ Duke)
V Raghuraman, Head of Energy, Envt, & Natural Resources, Confed of Indian Industry

The contrast of opinions and projections was awesome. If I could highlight one major point I took from each panel discussion member, it would be:

Ezekiel:
The CDM has 2 phases:
2005- 2007, which failed miserably because of its market design in which over-allocation of free carbon allowances killed the market, and we saw 0 impact on emissions.

2008-2012 Expecting much improvement based on a new market design and many of the "kinks" worked out.

Raghuraman:
India: A mixed outlook on CDM because they started late and as such are forced to mitigate.
Most big industrial players in India are public, however most initiatives come from the private/NGO sector, therefore we see a disconnect right now between those that want to implement and those that should implement. In fact, many of India's upcoming projects are not looking at CDM.

Profeta:
The US political outlook on the subject in terms of chances of passing this bill are:
10% chance this congress
90% chance next congress

All US presidential candidates: Clinton, Obama, and McCain are in favor of a system, most strongly backed by McCain of all candidates who got on board back in '01. This will happen next presidency (we should note that the McCain - Lieberman Carbon Reduction Senate Bill was written by Dr. Profeta, and later it transformed into the current McCain-Warren Bill) There will be a debate on Senate floor before the Memorial Day recess. The US is studying a 70% reduction in emissions by 2050 from the 2005 level.

There are currently 2 main issues:
1) CDM is under political attack
2) The US can and probably will go to another trading system and only allow for 15% of its emissions buying on Europe's carbon trading markets

There are 45 billion pounds of greenhouse gases released into the atmosphere every year
67% of the total between now and 2050 is in the US and China.
Therefore, a bilateral deal could solve 2/3 of the problem

Ho
There are profit model issues here that need to be considered.
They looked at a wind farm investment in China that had an IRRof 4-5%, but if CDM credit trading could have been included, then the IRR would jump to 9-10%.

Moreover, this credit trading system is opposite to traditional building. In housing, you get the loan first, then you build. There are no such loans for CDM structures - you only enjoy the benefit three years after the reduced emissions are realized.

Remarks about Guanxi

2008-04-06T10:44:00.000-07:00

My weekly book review this week brought me back to a fantastic publication from 1994 entitled, "Gifts, Favors, and Banquets: The Art of Social Relationships in China" by Mayfair Mei-hui Yang. This is an incredible piece that goes through the history of Guanxi and also some proven techniques that shed light on how to effectively work through getting things done in China. There is so much to be said on this topic, but I want to include a quotation from the very beginning of the book which provides a historical root for the practice in China. Before reading it, here is the lesson: giving and receiving is a fact of life, rite, etiquette, and ancient precedent (the source, The Book of Rites, is from the first centure BC) in China, and it needs to be studied cautiously as part of any due diligence or planning period in investment ventures in China.

太上贵德
其次务拖报
礼尚往来
往而不来
非礼也
来而不往
亦非礼也

Translation:
In the highest antiquity they prized (simply conferring) good;
in the time next to this, giving and repaying was the thing attended to.
And what the rules of propriety value is that reciprocity.
If I give a give and nothing comes in return,
that is contrary to propriety;
if the thing comes to me, and I give nothing in return,
that is also contrary to propriety

-Li Ji (Book of Rites) "Qu Li,"
1987:7; Legge 1885:65 [1]

[1] Yang, Mayfair Mei-hui, 1994, New York, Cornell University Press.

China, Laos, and the ASEAN sphere of influence

2008-04-04T06:40:00.000-07:00

When I saw this headline, "Laos: Laos-China trade reaches 241 mln USD" I was immediately reminded of my trip to Laos last year. [1] No, it wasn't the beautiful temples in Vientienne, or the awesome scenery throughout the hills, nor the hiker paradise around Vang Vienne, nor that amazing coffee shop (and greater commercialization in general) in Luang Pra Bang. What struck me about this was just how readily apparent China's sphere of influence has become over the last five years in ASEAN, nowhere more apparent than in Laos. We crossed the border into China by bus in February of 2007, in a very similar fashion to how I had done so 5 years earlier. The glaring difference was that 5 years ago, the Laos side of the border was a no-man's land but the it was absolutely under the total control of the Laos authorities. Even though Chinese cars were crossing through at that point, they were still dealing entirely with Laos border patrol. Last year was totally different. Instead of dealing with Laos patrol, Chinese tourists were being carted through exclusively by Chinese tourist group leaders backed by pseudo-China authority. It was incredible! They barely even acknowledged they were in another country. Moreover, you could tell who was paying whom under the table, and to my even greater shock, the Laos authorities did not pay even nominal attention to what the Chinese tourists and group leaders were doing logistically to get across the border. Well, I guess that's how it is now.

General Liu Yazhou on China, Japan, and the United States (Part II)

2008-04-03T10:33:00.000-07:00

In the second part of General Liu's interview, he continues with his smoke and mirrors by challenging the common notion that China is the major enemy of the US in the current global environment. Instead, General Liu contends that Japan has continued to be the US' top concern over the last 60+ years and that remains in effect today,

"I have always believed that the primary adversary of the United states in Asia is not China but Japan. It is quite probably that not a few knowledgeable persons in the United States share this belief. The United States defeated Japan sixty years ago. That was a difficult and hard-fought battle for the United States, and Japan left it with a deep impression indeed. Japan's stalwart national spirit, well-equipped educational system, and highly developed science and technology - all these combined drew respect from the world. In Churchill's words: "Japan's war machine is frightfully efficient." In only three months' time Japan drove the British and U.S. forces out of the Pacific and Southeast Asia. What country had done so in the past? And what country will be able to do that in the future? Toward the end of the war, when Japan was at the end of its tether, it still drew up a plan called 'break a hundred million pieces of jade [committing suicide].' Awed by this display of determination, the United States finally resolved matters by dropping the atomic bomb. What sort of understanding did the United States gain by fighting this war? It concluded that Japan was a fear-inspiring enemy. The qualities a country displays in wartime can also be displayed in times of peace, although in different domains. This is manifestly evident from Japan's post-war flying economic advances...Japan was a pile of rubble in 1945. It was more or less the same level with China in the 1960s. Then China started its 'Great Cultural Revolution' and tormented itself whereas Japan's economy began to take off. in less than twenty years, Japan left China far behind and was way ahead, catching up with the United States. However, the United States consistently kept a choke hold on the Japanese economy. Japan was highly adept at manufacturing 'small' products but could not make a single 'large' product. Then, with the advent of the science and technology revolution, Japan once again tried to push ahead. Not daring to leave matters to chance, the United States hurriedly concocted an Asian financial crisis and succeeded in curbing the impetus of Japan's spurt forward. The United States knows that China is a country that places inordinate importance on ideology, goes to extremes, is very good at waring itself out, or what might be called "self-destructing," and cannot get is act together. The Japanese are a highly cohesive people. China is like an old man; Japan is like a youngster. China is lethargic, whereas Japan brims with vitality. That is why the United States is much more wary of Japan than China."

I'll interrupt General Liu here only to say that he is sending a signal here. Everything that Japan did from 1960 to 1989, China has now duplicated in every respect other than the average standard of living for its people. Infrastructure is world class, technology has moved forward, higher education is booming, and the people feel young again. Moreover, there is a determined advance underway in China's political circles - the leaders are made by the time they are forty. Many of our closest colleagues in government are making impacting economic decisions on their locales and these leaders are usually between 35 and 45 and have extensive experience abroad. The old man argument does not fool anyone. If anything, it expresses the fact that China finds itself wiser and more capable of taking on an opponent years ahead of it.

General Liu continues,

"That is why the United States has kept Japan so rigidly under its thumb. The United States is much more wary of Japan than of China. So now we can understand why the United States formulated a peace constitution for Japan, a constitution under which Japan forever anjures warfare. The United States is very selfish. It is not doing this for China or Asia but only for itself. It has done this so that when it eventually dominates the world it will have one less opponent and one more helper. In accordance with the U.S. design, today's Japan has become an economic colossus but remains a military dwarf and a political midget. As Shintaro Ishihara put it, "The United States has cut away Japan's testicles and Japan can only serve the United States as a court eunuch." Today, Japan is literally and faithfully serving the United States as a global court eunuch."

Well, I do not want to treat General Liu's metaphor with any type of indifference, because the truth of the matter is that I could not agree more. For a nation as militant as post-Meiji Restoration Japan was, the US has certainly caused an unnatural turnaround in their sovereign mission. Perhaps General Liu then is also signaling a glaring opportunity for China's sovereign desires.

General Liu also mentions that the US has put up more defenses against China in the forms of Taiwan and North Korea...

"The United States feels that having Japan as its only military dog is not enough, so it has bred the 'Taiwan Independence' military dog. These two dogs are keeping watch for it over China...The current focus of the Asian strategy of the United States is on firmly controlling Japan and at the same time guarding against China. 'Hold on to one, and keep an eye on the other.' And if possible possible, 'Swallow' yet another. Which one? North Korea."

General Liu seems to make a good case for the US' recent policy in Asia. I believe that once again we are going to see a war fought in North Korea, but this time it will be political and economic, not militaristic. Frankly, the recent negotiations between South and North Korea about liberalization would seem to favor the United States, as South Korea is every much in the US' pocket as it is in China's. However, if you talk to entrepreneurs in China, many of them have been buying and selling across the Jilin border town of Dadong into North Korea for years now, apparently giving the Chinese the upper hand in terms of economics. Of course we know that the US has an uphill battle to fight politically, given that almost all of North Korea's anti-West rhetoric over the last 50 years has been explicitly aimed at the US. Moreover, during that time big brother China was North Korea's only true ally. Nevertheless, if the US can meander into North Korea's political circles through South Korea, then it ultimately will have the best chance at setting up another front against China.

Finally, General Liu hits on a subject that really makes one think...

"However, that is not the end of it. The Asian strategy of the United States has still another and deeper level, a core level-preventing China and Japan from joining hands...Everyone thinks that is impossible, but Americans believe it is possible. Americans are always able to look ten or more steps ahead when they formulate strategy. We are doing quite well if we manage to look one day ahead. They are able to look two days ahead, three days ahead, and even farther. The biggest difference between China and the United States is the difference in the level of strategic considerations. The United States takes the whole world into consideration, enabling it to look farther ahead. Our perspective is regional, and that is why we are a notch inferior in our calculations. The United States knows that under the present circumstances, its position in Asia cannot be shaken by the individual power of either China or Japan, and the sole possibility of anything happening is if china and Japan join hands."

True. And we also have to read between these lines and realize that even General Liu himself finds that condition impossible under the present circumstances, because he knows that the leadership in Beijing and the will of the people of Japan is nowhere near ready for this. Why? First of all, because life for Japan has been great under the direction of the US. Moreover, the economic benefits that Japan enjoys from its trade relationship with China fall far short of the total benefits it receives in return for its current relationship with the US, including: greater access to world capital markets, a steady flow of immigration to the United States, preferred status among other nations for entering and leaving the United States, preservation and growth of its own culture, the highest standard of living in the world, etc. Can China offer this? Moreover, can China get over its own animosity for Japan? That of course remains to be seen.

[1] Chan, Alfred L Chinese Law and Government, vol. 40, no. 2, March - April 2007, pp45-49

General Liu Yazhou on China, Japan, and the United States

2008-04-01T05:06:00.000-07:00

Last week I read one of the most astonishing and in-depth policy papers about the Chinese point of view of East Asian military strategy that I have ever seen. It was so impressive that I think it deserves a summary and comment here. I must mention the whole essay is actually excerpts from an interview between General Liu and a reporter from a 2005 article in the Beijing monthly, Dazhanlue guan. Our source is the translation found in the March - April 2007 edition of Chinese Law and Government. This article is so impressive and causes for cogitation on so many issues that I will have to devote more than just one entry to it. Finally, a brief introduction on General Liu copied verbatim from the beginning of the journal is as follows, "The son of a regular soldier in the Eighth Route Army, Liu was born in 1952, joined the People's Liberation Army (PLA) at age fifteen, rose through the ranks accruing extensive command experience, and became deputy political commissar of the PLA Air Force in 2003. Also an accomplished and prolific writer of report literature and novels since the 1980s, Liu has increasingly turned his pen to strategic thinking and military matters and is now one of China's most influential strategic thinkers." [1]

Interestingly enough, Liu starts with Europe before getting into the discussion of East Asia. He states, "In those years (post-WWII), the United States adopted a defensive stance in the face of the menacing concentrations of Soviet tank formations. But now the Soviet Union has collapsed, and the United States has gone on the offensive. However, one should not infer from this change in its offense-defense posture that the United States has shifted its strategic focus away from Europe. In fact, so long as the U.S. objective is to dominate the whole world, Europe reamins its center of gravity, its basic bearing point. It plants one foot on its own land - the United States - and the other foot on Europe. Doing so enables it to stretch out both its arms to cover the whole world. Asia does not furnish the conditions for shoring up the U.S. ambitions...When the Iraq war broke out, Europe saw through the United States' intention of controlling the center of the world as a prelude to taking control of the European continental plate, and they opposed that war with exceptional vigor - in fact, more vigorously than some of the Arab countries. But the United States fought the war anyway, and Europe was forced to swallow the bitter pills."

Fascinating. This is something that stares us smack in the face every day, but I believe we often forget about or overlook the significance of our military bases in Germany and southern Europe, or the reason the UK followed us right into Iraq with barely even batting an eye. The question is, what impact will this have on our Asian strategy?

Before he gets into talking about Japan, he spends a quick minute on a key point about the oversight that most Chinese have when studying the Taiwan issue,

"Those of us who have a world perspective can sense the heavy pressures to which others are being subjected, but those of us who merely have a Chinese perspective only sense that the United States is using the Taiwan issue to cause trouble. Actually, the pressures to which China are subjected are relatively minor compared to those offered by other countries and especially Russia. At first sight, it would seem that the exacerbation of the Taiwan issue places China in a dilemma. If China engages in an all-out arms race with the United States or, in other words, engages in an all-out arms race with Taiwan, it will ultimately be worn down by the United States, just like the Soviet Union. Yet if China maintains a policy of low military spending and devotes its financial resources to economic construction, the disparity will further increase and China will be helpless before the U.S. military blackmail."

From General Liu's perspective then it seems as though China has no way out. But much of this comment is smoke and mirrors and not a very good job of misdirection at that. What we should read between these lines is that there is no intention of China to engage in an arms race with T@iw@n (TW) when it fully believes that its colossal economic influence over TW can be converted into an equally effective political influence over time. Hence, one of General Liu's implicit suggestions of how to resist the expanding US world takeover is to be fought on the steps of the Yuan and TW's other political institutions. This goes a great way to explain why the Communist Party has been so active in inviting TW's leaders such as Lien Chan to tour the mainland and strengthen the political ties between the "two" countries.

[1] Chan, Alfred L Chinese Law and Government, vol. 40, no. 2, March - April 2007, p3

AMB Expanding China Holdings

2008-03-30T19:27:00.000-07:00

I must say that I was extremely pleased to see that AMB is growing its China portfolio. As a believer in the enormous potential value that China's real estate industry holds for experienced American developers and real estate asset managers, I trust that our country's top firms will derive enormous profits from China in the future. On Saturday, the Shanghai Daily reported that,

"AMB Property Corporation, a world leading developer and owner of industrial real estate, announced yesterday that it had acquired approximately 133,100 square meters of land in the Xiuzhou Logistics Park in Jiaxing of Zhejiang Province. The company said it planned to build a 74,612-square-meter distribution center on the site, its latest effort to expand its distribution network throughout the country...AMB announced earlier it planned to operate US$1 billion to US$1.5 billion worth of assets in China by 2010. It currently runs a portfolio of approximately 185,882 square meters of distribution spaces in Shanghai, Kunshan and Ningbo. ProLogis, a United States developer, owner and manager of distribution facilities, has also recently expanded its footprint in the city through land acquisition in the same logistics park." [1]

If you look at AMB's past, China is a natural fit for them because they tend to raise their money privately. That matches well with the value-based investing that long-term investor industrial real estate investors are looking for in China. As Moghadam says, AMB, " 'has never raised money on Wall Street beyond our IPO.' Since its initial public offering, AMB has gone in the opposite direction of most REITs by retiring more than 6 million shares of stock through buybacks." [2]

AMB raises most of its cash through private capital - institutions and other funds that look for a leading industrial real estate firm to offer predictable returns on prime industrial complexes. What's amazing about AMB because it is an industrial REIT, its fortunes are barely connected at all to those of the general residential real estate market. In fact, its 2007 earnings of $2.96 per share were nearly triple 2006 earnings and almost double 2005 earnings. [3] Hence, while the residential market was still booming in the US, AMB was going through a bit of a slump. Likewise, while the residential market began to tank, AMB's profits grew nicely.

AMB is also a company to take note of because its approach. This move into Jiaxing, along the Yangtze River Delta, should signal to investors that the company now has its feet wet in China after investing in Shanghai, Kunshan, and Ningbo. Therefore, it will feel comfortable going after properties that need greater managerial expertise to derive value out of them in order to really position its investments in China to derive significant profit margins.

[1] by Cao Qian 29 March 2008 Copyright 2008 Shanghai Daily Information Company
[2] Bergmann, Paul, Maverick Real Estate Investing, Copyright 2004 by Literary Productions
[3] Standard and Poors, March 30th, 2008

China vs Rio/BHP

2008-03-20T08:35:00.000-07:00

The standoff that is going on right now between Rio Tinto, BHP Billiton, and China is amazing. This is one of China's very first tests of macro supply chain that will determine how much China can control price hikes in iron ore for decades to come.

China has summarily refused to accept Rio Tinto and BHP's 71% price increases.

Although they seem to indicate that the reason is the increase is too high, that is a bit hard to accept given that they handled Vale's 65% price increase just two months ago. No, there is much more at stake with Rio Tinto, BHP, and China.

China wants a much bigger piece of the deal this time, and they have decided to strike while the iron is hot. If they can continue to stave off the spot market shipments for a few more months, Rio Tinto and BHP will effectively lose several billion dollars in revenue. That may cause the market to hammer their share prices and give China more leverage to buy a much larger stake of the planned merger than was originally anticipated. My guess is that China wants at least 25% of the new company with two or three board members to boot.

This battle is about the future of China's steel industry and several downstream industries that flow from there such as automotive and construction. They are betting that they can sweat it out longer than BHP and Rio Tinto's shareholders. My guess is that they are correct.

Maotai: A Consumer Monopoly?

2008-03-13T06:49:00.001-07:00

I was particularly struck by an article I read last week that mentioned Maotai liquor's net profit was up over 83% last year. [1] That's a phenomenal year by the measure of any mature growth stage company, and it is strange to see beverage companies produce such amazing results.

Given that I am a huge fan of the Oracle of Omaha, Mr. Warren Buffet, I began to wonder, would Buffet ever consider investing in this company? What I am really interested in is whether or not Buffet would consider Maotai Liquor a consumer monopoly?

I believe it is and here is why:

With rare exception, no matter what liquor shop or decent restaurant you go to in China, the vendor must provide certain brands off baijiu (sorghum wine - Chinese vodka/whisky). It is my belief that one of those two is Maotai. (The other brand in my opinion is Wuliangye).

An extension of this means that Maotai will be able to dictate to its vendors price increases, instead of the vendors putting pressure on Maotai that they will cease to carry Maotai unless they lower prices. Evidence of that came in the same article..."Kweichow Maotai has raised ex-factory prices of it s products by an average of 20% from January 11." [1] Again, the distributors and retailers are really helpless to rises in factory prices of Maotai because they have to carry the brand or they will lose patrons.

Next, how recognizable is the brand? Well, Maotai liquor is not only recognized among the Chinese domestically, but I would say that millions of foreigners from an earlier generation could even tell you that Mao Zedong's "official" drink was Maotai. Despite that bit of infamy, Maotai is definitely one of the most widely recognized brands in all of China.

Finally, can Maotai lose this positioning? Can management "screw things up?" I doubt it. Again, typical of most consumer monopolies, once you attain a certain position in the market, it is very difficult to screw things up. Even if millions of Chinese started overdosing on Maotai at local restaurants, I simply cannot see any way the Chinese government would let them go under. Remember, the vast majority of Maotai is being consumed in China. Thus, despite the international brand recognition, the baijiu is being consumed domestically, so any problems that may arise would be considered a "China" problem and not subject to outside political influences.

This means that for those fundamental investors, do your homework and research Maotai's traditional PE ratios and return on equity numbers. Then, sit back and wait for the market to hammer its share price, and then jump in and hold on for the long term.

FDI 'Slowdown' in February is Comical

2008-03-13T06:20:00.000-07:00

According to an article in the Shanghai Daily today, Foreign Direct Investment into China slowed drastically to a year on year rise of...38.3%! [1] You know times are good when slowing down to 38% growth represents a drastic reduction. Of course, when your main barometer shows inflation charging ahead at 7 - 9%, then you probably need that much growth in investment just to stay ahead.

What really struck me about this article however was the following...

"New foreign-funded firms fell 38.02 percent to 1,454, as investors focused on bigger and more capital-intensive projects, said Li Maoyu, an analyst at the Changjiang Securities." [1]

As a sign of the times, this plainly means that the central government is much more interested in encouraging larger scale projects that not only will help the macroeconomics of China, but also are more easily controlled by the central authorities. Furthermore, it is a sign of the continued changing demographics of China as urbanization continues to steamroll ahead and China's tier-2 and tier-3 cities consolidate and attract millions of migrants.

[1] Wang Yanlin, Shanghai Daily, March 13, 2008, (c) Shanghai Daily Information Company

China Transportation - Subway or Rapid Transit?

2008-03-11T05:06:00.000-07:00

Earlier this week, the following story about Wuhan's subway system expansion really struck me,

"City In Central China Plans To Spend $40B On Subway System...Wuhan, capital of Hubei province, plans to spend CNY300 billion (US$40 billion) to expand its subway system, Xinhua said. It will be extended from seven to 12 lines with 309 stations by 2015. Once the expansion is finished, 66% of the city's 8.7 million people will be able to find a subway station within 600 meters of their home, Xinhua said." [1]

Certainly for China's mega cities, of which Wuhan truly belongs in the mix, building a massive underground system is in order and will effectively reduce congestion in the years to come. But, what about China's smaller cities? Does the benefit outweigh the cost for cities such as Qingdao, Dalian, and Shenyang? Are there better and cheaper alternatives for Wuxi, Changzhou, Suzhou, and Hangzhou?

Yesterday, I was given a fantastic opportunity to put that in perspective when I visited with Professor Ralph Gakenheimer of the MIT's School of Architecture and Urban Planning. Dr. Gakenheimer specializes in urban planning and transportation planning and brought to my attention an interesting alternative to subway lines that has really caught on in Latin America, Europe, and increasingly the North America and Asia. That system is something called Rapid Bus Transit, or Rapid Transit. What happens in a system like this is that the municipality builds an extra lane exclusively for buses that will stop only at express points in a city or along a highway. To get on and off the bus, you need to have entered similar to a subway where your fare is already paid so that passengers get on and off the bus quickly. Dr. Gakenheimer says average stop times are reduced to 20 seconds and falling.

But, the real advantage to the system is the cost savings it offers a local government. Subway lines cost approximately $100 million per mile in the US (costs for China are unavailable). Rapid transit lanes, however, cost between $10 and $15 million, representing savings of between 85% and 90%. That is a tremendous savings and Professor Gakenheimer indicated that many of China's emerging 2nd and 3rd-tier cities that are dreaming of subway systems would be better suited to start preparing to build these alternative and more cost effective systems.

March 4th Asia Society Talk Notes

2008-03-06T11:35:00.000-08:00

I had the absolute pleasure earlier this week of listening to four China hands talk politics, law, economy, and much more at a meeting at New York's Asia Society on Park Avenue in New York. Moderating this four-person discussion was Howard Chao, Partner and Head of Asia Practice for O'Melveny & Myers LLP. He was joined by Nicholas Lardy, Senior Fellow, Peterson Institute for International Economics, Jonathan Woetzel, Director, McKinsey & Company, and Jimmy Hexter, Director, McKinsey & Company. Woetzel and Hexter's new book, "Operation China: From Strategy to Execution" was available after the talk for attendees. Here are some highlights from the talk:

Dr. Lardy began the talk with an overview of China's macro-economic barometers. One of th things I found most astonishing was that China's current account surplus is between 10 & 11% of GDP. By comparison, he noted, Japan's greatest account surplus in the 1980s was 4% of its GDP. That means that China seriously has a lot more cash stored up than even Japan did.

He went on to say that the jump in China's prices is not restricted to just food prices and the overall CPI, but rather the PPI, a barometer of price movements in machinery, is also up and accelerating more aggressively than the CPI.

Next, he talked about why there was so much craze for investments in stocks and real estate by showing us the following:

CPI: up 7%
Savings % offered by banks: 0.71%

So, your real savings rate is greater than negative 6%. Apparently, this is a textbook case of how you create a bubble in other asset classes. Of course, when you have 300 million people urbanizing, you are going to need huge amounts of capital investment in capital-intensive projects.

Next, Dr. Woetzel noted some interesting trends as well going forward...

Migration: From 1990 to 2007, apparently 250million urbanized, but mostly through establishing new cities and shifting boundaries. That's not going to happen because of land restrictions in the future. Effectively since that time, there have been only 100mm migrants to the major cities. Looking forward, there will probably be another 250mm migrants headed for the cities and a total urban population of 1 billion urban.

That is going to drive macro costs of health, education, and food way up. And the greatest burden will likely be on 3rd and 4th tier cities.

Jimmy Hexter then weighed in on China business strategy by explaining that the winners in China historically were those that executed bold strokes of strategy - whether through gaining advantageous licenses, exclusivity, or other sundry tools. However, as we look forward, the winners will most likely be those that deliver excellence of execution. Specifically, companies that can migrate world's best strategies and get their domestic operations to perform better at sourcing, procurement, manufacturing, sales, distribution, and development will win.

By his account, there is an enormous opportunity to improve performance in China, with increasing outputs by 30-50% via this shifting global best practices to result.

60%+ of exports are machinery and electronics

As far as the effect any rising world raw material prices will have on causing countries to shift to Vietnam and other Asian export economies, not likely to happen any time soon. Dr. Lardy cautioned us to remember that Veitnam's total exports amounted to $40billion in 2007, whereas
China's topped $1 trillion.

There was also a discussion of the transient talent pool in China. Here's why they move from one job to another:
1) Influence - want opp to drive performance
2) Promotion
3) More money

What they really want boils down to greater inclusion and recognition. Until they get it, we're likely to continue to see rates as high as 40% job turnover every year in China (in the US by comparison, it's 20%)

The final major topic that was discussed was capital flows in China. What we are seeing is huge amounts of capital being raised around the world, and a good portion of it is flowing to Asia and in particular, China and India. China has become a gigantic player in trade and finance, yet locally, allocation of capital has been poor because, as a result of the negative savings rate mentioned above, a large swathe of unsophisticated investors operating under duress are forced to enter a capital market that they do not really understand.

There was a great comment made about private equity investments in China. Apparently, right now, the players there that are doing well are small China private equity companies that are doing well investing in small companies with niche regional markets. For large caps, it is difficult right now because of high valuations, struggles for control, and disagreements over management.

This was a great talk put on by the Asia Society and we will continue to update you as more relevant talks occur.

Non-communist Officials - What a Joke

2008-03-03T21:33:00.001-08:00

Boy this type of article really pisses me off...I simply do not understand this: "China to opt for more non-Communist officials." [1]

The article begins by stating, "More eligible non-Communists are expected to become high-ranking officials in China following last year's appointments of two non-Communist ministers, said a spokesman of the forthcoming annual political advisory session. Many non-Communist personages have taken up posts at government departments and judicial bodies since China started its reform and opening up (toward the late 1970s), said Mr Wu Jianmin, spokesman for the First Session of the 11th National Committee of the Chinese People's Political Consultative Conference (CPPCC). Mr Wan Gang, of the China Zhi Gong Dang (Party for Public Interest), was appointed minister of science and technology last April as the first non-Communist party cabinet minister since the late 1970s. Two months later, Mr Chen Zhu, non-party member, became minister of health. Their appointments represented major moves of the Communist Party of China (CPC) in enhancing socialist democracy and pushing forward multi-party cooperation and political consultation under the leadership of the CPC, Wu said at a press conference on the eve of the annual political advisory session."

Sorry folks, that is what is known as propaganda and I have a real problem with it - the same type of irk I recall when reading about the labor unions in WalMart that were headed by communist party members. Here's what bothers me so much. It's the way that the central communist party believes that things are really different in this dynasty. They're not. The power structure is still in tact - strong central monarchy backed by a unifying military and pervasive dissidents throughout the provinces with growing wealth. The only difference this time around is that Beijing has to deal with the whole outside world, and not just 'the old barbarians at the gate.'

Now we get this...two minsiters appointed from without the ranks. Can they defy the party? Can they provide some basis for checks and balances? Can they survive by taking a position of dissent? Let's ask Zhao Ziyang how that worked out for him. That's like an all-star game in basketball - you know, the type of game where everybody is really on the same team, nobody's fouling, nobody's playing defense, and the outcome is really just nominal. That's my microcosm for these appointments. The message is clear: Life is quite good in the political spheres of China these days.

China Technology Gap Narrows

2008-03-02T21:16:00.000-08:00

Interesting article yesterday in Maeil Business about the technology gap shortening between Korea and China...

With Chinese enterprises pursuing at a frightful speed by means of an industrial spy or imitating industrially advanced nations, the technology gap between chief industrial corporations of Korea and China was found to be narrowing at a fast rate. According to the Korea Institute for Industrial Economics & Trade (KIET) on Sunday, a research conducted November last year, on 608 major companies in 10 core industries such as automobile, electronics, shipbuilding and semiconductors, evaluated the overall technology gap between Korean and Chinese manufacturing industries at 3.8 years. Technology gap between Korea and China had been evaluated at 4.7 years in 2002, 4 years in 2004 and has continued to narrow down.[1]

Now, I really have no idea how you would effectively measure this; it seems so onerous and dubious, yet at the same time it does seem to me that Cherry cars are about 4-5 years behind Hyundai cars and Haier is about the same length behind Samsung in electronics. But, I am not so sure how far you can go with this. For instance, there really are no major Korean lap top manufacturers out of Korea that we see competing on a global level on a daily bases. Moreover, when was the last time you saw a Korean telecom company try and bid for a US telecom company. Moreover, Chinese companies are on spending sprees to buy technology abroad - and they currently have much deeper pockets than their rivals in Korea. For that reason and the following additional reasons, we think this convergence will accelerate in the coming months:

1) Economies of Scale - Korea cannot possibly compete with China in numbers or foreign reserves to buy companies/technologies abroad
2) FDI - China is just crushing Europe here, let alone Korea
3) Technology transfer - astute China policy necessitates this in many investment deals
4) Reputation - now this needs some qualification. I am referring specifically to biotech and an incident in which one of Korea's most famed scientists, Hwang Woo-suk, falsely advertised successful fabrication of human embryonic stem cells by cloning. You will not see many Americans going to Korea for stem cell surgery - but they're flocking to China. The technology gap here in terms of revenues per unit of technology is most likely in China's favor and if not it will be within a year or two, not four.

The Effects of Steel Prices Rsing

2008-02-28T21:19:00.000-08:00

Rio Tinto, BHP Billiton, and Vale are major corporations and they're going to get theirs too, there's just no two ways about it. After Rio Tinto and BHP Billiton merge in two years, that neew mammoth $400 billion company will probably set its sites on Vale, assuming of course Vale has not ammassed its pile of smaller acquisitions to compete. We shall see.

On Tuesday, Xinhua gave a pretty nice summary of the recent iron ore price hikes, their inevitability, and their effects on steel prices in the coming year. Let's break this article down into those three sectoins:

1) Price hikes...

"After Brazilian mining conglomerate Vale hammered out 2008 benchmark prices for iron ore fines with Japanese and Republic of Korea (ROK) steel makers last week, Baosteel Group, China's largest steel maker, agreed on the price for fiscal 2008, accepting the Brazilian miner's price hikes that ranged from 65 percent to 71 percent compared with 2007."

71%!! I'm confused now because the rule of 72 is only supposed to be for compounded returns - so what happens if you get there in one year? Does 72% = 100% if it's one year? No, of course not, but if it did that probably would require me to immediately find a finance professor.

What's more, the article says that an almost identical hike occurred two years ago...

"Since China joined the international pricing negotiations in 2004, the price has risen every year. Price negotiations for 2004 ended with an 18.62 percent increase, followed by a 71.5 percent rise in 2005 and a 19 percent increase in 2006."

Now we can use compounding equations, and by such numbers, it would appear that steel prices have risen 2.5x over the last four years. What is this doing on a practical level? Let me give you a quick insight into our world. Two of my clients in the last week have said that their products are now more competitive if made in the North America - one in the US and one in Mexico. I am certainly not suggesting that this will be the case for years to come, and perhaps this is because their current China suppliers are in East China (as opposed to the cheaper western and central regions), but nevertheless, I do think this is a sign that things are moderately changing across various industries.

2) Inevitably. Basically, according to the article, this hike was going to hit China whether they liked it or not, whether they negotiated hard or not, and whether they neotiated early or not - it was all numbers...

"Baosteel, the partly state-owned representative of China's steel makers in the pricing negotiations, faced a challenge. The miners were holding out for higher prices, while other major Chinese steel producers wanted a favorable pact. Given the huge share of the market that China represents, Baosteel may have believed it had more bargaining power than it did. CISA estimated the 2008 price rise at only 20 percent.

So Baosteel waited -- but others negotiated.

'Even if Baosteel had concluded negotiations first, the price hike would not be lower,' said Hu (Kai, a senior analyst with the Chinese Umetal.com website.)"

There was no way around this. Especially given the fact that Chinese steel makers have enjoyed fat profits over the last two years as China's stock market has boomed.

3) Pricing effects

Well, we alluded to it above, but they make it quite clear in the article what the price increases are likely to be on steel tonnage...

"

The China Securities Journal reported on Monday that 57 domestic steel mills had raised their prices after the benchmark price was settled. And on Tuesday, the newspaper reported that Baosteel had raised steel prices for the second quarter of 2008. Its prices for major cold- and hot-rolled products will rise 800 yuan (111 U.S. dollars) per ton in the second quarter, compared with the first quarter, Tuesday's China Securities Journal quoted an announcement by Baosteel as saying.

Considering that Baosteel has a heavier reliance on imported iron ore than other domestic competitors, a 65-percent iron ore price rise could translate into cost mark-up of 258 yuan for Baosteel, as against 116 yuan for other domestic steel makers, according to statistics from Chemease, a business information provider on Chinese chemical commodity markets.

But a price hike of up to 800 yuan would offset its cost mark-up and also provide ample profit margins, said Chemease analysts."

So, why not just buy steel from Benxi I&S, or Ma'an I&S? It's just not that simple for two major reasons:

1) Logistics
2) Quality

Baosteel is one of the world's best steel plants and there are grades and qualities of steel that you need for certain applications that are available at perhaps two or three more factories in China. Secondly, the country is so large that regionalism plays a huge role in determining which steel ends up in which factory.

At the end of the day, the iron ore price hikes, in addition to oil, are the largest drivers of industrial price inflation. If we use this though as a basis for comparison, then what is the industrial subsidy equivalent for China's large subsidies on refined oil/gasoline? I would say that this question gets answered every day by those that find the real deals in China and those that just cannot seem to be profitable in China.