1. Wall Street is literally and figuratively a world away. If you want to make money from the China Miracle, you must have
someone with boots on the ground experience on your side.
Lots of pundits go to Pudong, stay in the Grand Hyatt, attend some meetings and
go home “experts.” But at street level we notice
things that often escape the attention of Westerners.
I often talk to people who visited China years ago and find their perceptions tend to be outdated. The China they knew was the China of the
past. Today’s China is different, and it’s changing every single day. My personal visits and our team of analysts help us keep up with the
changes in the world’s most dynamic economy. This street-level knowledge gives us a significant advantage over Wall Street in identifying the
best companies to help us build our fortunes from the China Miracle.
My mission in life is to help citizens of my adopted country, America, understand and profit from the return of China to the status of a great
civilization. I personally visit China to search for new investment opportunities.
I walk around the markets and malls in the provinces. My team and I troll the Mandarin- and Cantonese-language websites. In all the throbbing,
innovative energy, there’s a doubler, maybe a ten-bagger waiting to be uncovered for my China Strategy subscribers.
That’s how I found our solar panel maker. In a corner of a deserted mall, one shop was mobbed. Homeowners were grabbing solar panels,
and cash registers were ringing. Our research and interviews confirmed our suspicion. This is a huge opportunity.
Think of me as your Peter Lynch in China. Lynch’s boots-on-the-ground strategy works superbly in a country where Wall Streeters
in wingtips are totally lost!
2. Before you can start making money, you must avoid getting caught in the traps that snare many unwary investors.
China is in the midst of the greatest economic boom in the history of the world. That presents both enormous opportunity and enormous
danger.
Many investors who have already tried to make money from China’s unprecedented growth have actually lost fortunes by trusting naive
fund managers or following advisors who don’t understand the unique dynamics behind Chinese companies, the government and the markets.
Most fund managers and advisors do not fully appreciate the risks unique to China—things like a lack of shareholder rights, low corporate
governance standards and an undeveloped legal system. That’s why a lot of investors have been burned.
Rule #1 for protecting yourself: Avoid most state-owned enterprises.
State-owned enterprises (SOEs) are exactly what they sound like: corporations owned by the Chinese government, many of which are publicly-traded.
They still make up the majority of China’s largest businesses. However, government ownership for most of them is a liability.
Several important findings from a recent Chinese census affect us as investors: First, the private sector has replaced SOEs as the primary
economic growth engine. As is always the case, bloated government-run organizations like SOEs don’t stand a chance competing against
the much more effective private businesses run by entrepreneurs who have a burning desire to succeed. That’s why SOEs generally make
terrible investments.
In recent years, China has transitioned from a government-planned economy to a market economy, creating enormous opportunities for private
businesses while at the same time harming the bloated, inefficient SOEs that are not used to responding to the marketplace. My research shows
that at least half of them will not survive the next decade in their present form. In fact, the portion of the Chinese economy controlled by
the state and the SOEs has already decreased from 90% to 50% during the past 15 years.
That’s why, despite China’s extraordinary growth, you generally want to avoid investing in SOEs. Most have been—and will
continue to be—lousy investments.
Notice I said “most.” There is one exception when it comes to investing in SOEs: enterprises with government monopolies in major
growth industries that still control their markets, such as energy and telecommunications. These monopolies are like licenses to print money,
and investing in the right ones can be very profitable. I will talk more about these in future issues of China Strategy.
3. The 2008 Beijing Olympics will be China’s coming out party.
When China hosts the next Summer Olympics in 2008, the world will be watching.
And China knows it. The Beijing Olympics will be driven by a combination of national pride and government propaganda to show the world that
a new China is emerging. Much like what the 1964 Olympics in Tokyo did for Japan, the 2008 Games will showcase China’s newly gained economic
and technological prowess—money will be no object, and no expense will be spared in making sure of it.
The Beijing Olympics will serve as China’s coming of age party in the 21st century, and it will be quite a spectacle.
Beijing itself will spend an astounding $33.8 billion just on Olympic-related infrastructure like venues to host events, roads, parking, etc.
As part of the cleanup, entire historic neighborhoods in old alleys (known as hutongs) are being reduced to rubble and replaced by colossal
new structures. A lot of citizens are being displaced, but most are in favor of the changes, as the government is relocating them to housing
elsewhere.
The incredible buildout and cleanup isn’t just taking place in Bejing. This same scenario is being repeated in out-of-the-way places 1,000
miles from the games’ center in Bejing. In fact, giant fleets of bulldozers and construction cranes are working around the clock to turn the
Chinese coastal city of Qingdao into a modern Asia showcase.
A second-tier city mostly known for its popular Tsingtao brand beer, Qingdao will host the sailing and windsurfing events for the 2008 Beijing
Olympics. In its bid to create "the best Olympic sailing regatta ever," Qingdao will be going all out to build five new highways,
a new stadium, a new hospital, a "great" theater, a new sewage plant, a new sailing port, an international cruise terminal, an Olympic
village and countless other projects in the next two years. These projects are estimated to cost at least $9.1 billion, and Qingdao city officials
hope that the buildout will put the city on the map.
Considering that sailing and windsurfing are not exactly the most popular summer Olympic events, it is unlikely that Qingdao’s vast investments
and efforts will generate a worthwhile return. Yet city officials are using the 2008 Olympics as an opportunity to engage in a massive infrastructure
buildout. On a smaller scale, cities throughout China are doing the same thing to get ready for the Olympics—even though most will not
see any lasting economic growth as a result.
China has a lot riding on the 2008 Summer Olympics, both with the world and its own people. This makes it an event not to be missed, and I
am already making plans to attend.
4. Chuppies will be a key driving force behind China’s growth and our investment opportunities.
In the past four years, American consumers and Chinese producers have been driving global economic growth. Although the two countries combined
account for only 40% of the world’s GDP, they are responsible for as much as 60% of total global economic growth.
American consumers, especially the affluent urban professionals from the baby boomer generation, have kept our economy going strong for many
years. However, this key demographic group is aging—and the oldest among them will turn 60 this year. As boomers in America age, their
income and spending power will gradually decline in the coming decade.
And so the trillion-dollar question is this: When the boomers retire in the coming decade, who will pick up the slack in global consumer spending?
We won’t find much help from consumers in Western Europe and Asia—many of these developed economies face even worse demographic
problems than we do. Germany and Japan, the second- and third-biggest economies in the world, also have some of the lowest birth rates and
highest percentages of seniors in the world.
So we turn our eyes towards China—the world’s fourth-largest economy—with a fast-growing middle class numbering over 150
million. China’s emerging middle class went from living at subsistence levels to having the means to dine out at least once a week at
a mid-priced restaurant in less than 15 years. What’s even more interesting is when you look within China’s middle class to the
consumer subgroup that’s emerging to lead consumption in China—the Chuppies.
I define Chuppies as young, affluent Chinese professionals. Chinese demographics are much younger than in other developed countries, with
72% of the population under age 45, and while the Chuppies are a relatively small slice of the Chinese demographic pie at the moment, the number
of Chuppies and their dependents is still staggering—at least 50 million consumers. Their rank continues to grow at over 10% a year.
Chuppies will likely succeed the Yuppies as the driving force of global economic growth. And yet, Wall Street analysts, who only visit the
Western establishments in China (if they even bother to go there at all), are missing this. While many articles and studies have been written
about China’s emerging middle class, there have been almost no widely published studies outside of China that deal with this emerging
economic force.
My teams in Shanghai and Beijing just conducted the very first Chuppie consumer survey to be published here in America. We interviewed hundreds
of upper-middle-class Chinese professionals in order to learn everything we could about Chuppie spending habits and preferences. The results
were fascinating, and are behind some of our most exciting stock recommendations today.
5.We aren’t so different. Just like in America, entrepreneurs are the driving force behind innovation and some of the best
investment opportunities in China.
The China Miracle is not driven by the government but by the people of China. In fact, the country’s hardworking entrepreneurs are the
reason why China’s economy grew more than 11% in the second quarter. I’ve suspected all along that China’s private sector
was substantially bigger than a lot of other people thought—especially most Wall Street analysts who rarely, if ever, visit there—and
this proves it.
China’s private sector is growing so rapidly that Beijing hasn’t been able to keep track of just how big the economy has gotten.
In order to cobble together a true picture of China’s roaring growth, the Chinese government surveyed private businesses across the land,
ranging from one-man noodle stalls to multibillion-dollar subsidiaries of Global 100 companies. Millions of polltakers across the country completed
a census, assuring business owners that the information taken would remain private. I believe that the survey results are reasonably accurate.
The economic growth there is being driven by nimble, hardworking entrepreneurs in the private sector.
Some of my favorite stocks today will help us profit from this innovation and entrepreneurship. For example, Focus Media, our biggest
gainer this year, was started by Shanghai native Jason Jiang. A young entrepreneur, Jason was waiting for an elevator a few years ago. Elevators
are often slow in China, and Jason realized he could install—right on the elevator doors—liquid crystal displays showing ads for
the luxury items that Chinese business people are working so hard for.
Last July, Focus Media went public after posting impressive numbers in the first six months of 2005. Today, there are 35,000 of Jason’s screens
in 52 Chinese cities—and Jason, now worth over $600 million—has just added another 25,000 displays and plans to expand his business
into movie theaters as another way to reach Chinese consumers.
I got to see the results of Focus Media’s efforts firsthand when I visited China last year. It was fascinating to see the 17-inch advertising
screens and how people reacted to them. Riding up an elevator in a 50-story office building, several of my American friends from Los Angeles
were mesmerized by the Hennessy Cognac commercial playing on the screen. I was impressed as well.
My subscribers have been too! Focus is up more than 56% for us in just under 10 months.
In China Strategy, I bring my subscribers many opportunities similar to Focus that are driven by hard-working, clever entrepreneurs
with a homefield advantage. They are a big part of the reason we are beating the market 2-to-1!
