U.S. Global Investors: "Rise of the Chinese Consumer" Webcast Transcript

Jun. 7.07 | About: U.S. Global (GROW)
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U.S. Global Investors (NASDAQ:GROW)

"Rise of the Chinese Consumer" Conference Call

June 7, 2007 4:30 pm ET

Executives

Michael Dunn - Director of Institutional Services

John Derrick - Director of Research

Romeo Dator - Portfolio Manager for the China Region Opportunity Fund Analyst

Presentation

Operator

Greetings ladies and gentlemen, and welcome to the U.S. Global Investors Webcast "Rise of the Chinese Consumer Part II." Please note that the slides you see on your screen are viewer controlled slides. This means that you control the advancing and the reversing of the slides for the presentation. It will be queued once you advance each slide. A question-and-answer session will follow today's presentation. (Operator Instructions).

Now we would like to begin by introducing Michael Dunn, Director of Institutional Services for U.S. Global Investors.

Michael Dunn

Thank you. We are pleased to welcome you to our Seventh Investment webcast of 2007. Roughly one year ago in May 2006, U.S. Global Investors' offered analysis of the emergence of the Chinese consumer. Today we would like take an opportunity to revisit and expand on that subject with our webcast, “The Rise of the Chinese Consumer Part II.”

In the past year, much speculation has been presented by the media and by many different experts with respect to the strength of the Chinese economy. Recently, Chinese market volatility has increased. The subject is currently a great interest to the U.S. Global community of clients, as more than 500 have tuned in to participate today.

Our effort will be to highlight some very interesting facts and figures about day-to-day life in China, in particular a focus on the Chinese consumer. And we are also happy to do our best to respond to any questions you might have about the Chinese markets more broadly.

Today's webcast presenters include John Derrick and Romeo Dator. John is Director of Research at U.S. Global, and is a member of the management teams at the Holmes Growth Fund, The All American Equity Fund, and each of the four fixed income funds offered by the firm.

John is the CFA charter holder, and is primarily responsible for the macroeconomic modeling at U.S. Global. Also with us today, having recently returned from China, from one of his eight visits there in just the past year, is Romeo Dator.

Romeo is a member of the management team for the China Region Opportunity Fund, the Holmes Growth Fund and the All American Equity Fund. Romeo is also a CFA charter holder, graduate of Duke University and Rollins College, where he received his MBA.

As a reminder, if you would like to ask a question, it’s in the left hand column, click on the attached question tab and that will come directly to us.

With that, please let me introduce, John Derrick. John.

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John Derrick

Thank you, Michael. Let's go ahead and get started on slide 2. In 1978, Deng Xiaoping created a vision and an economic revolution based on two key pillars. One was social stability and the other one was a rising middle-class, building a middle-class.

He has some famous quotes, and one of them is right on the front. “To get rich is Glorious.” And he also had a quote, "It is time to prosper". China has been poor for a thousand years. He recognized the need to build that middle-class.

The other aspect of that, the social stability aspect of it, came just after the Cultural Revolution, and to paraphrase, he said something along the lines of, “it doesn’t matter if the cat is black or white as long as it catches the mouse”. So, they moved from a more theological standpoint of getting things done to a more practical application of the need to improve.

If we could go ahead and move to slide 3, on Chinese tax-free zones. How he was going to accomplish the social stability and have the ability to build the middle-class was to do two key things. One was the development of tax-free zones. It's similar to what Ireland did to become a powerhouse in Europe and create significant areas of economic activity.

He also, to a certain extent, copied the American model. The American model was to have a robust, independent middle-class that is really the core of the economy. The other thing that the America had was infrastructure. They had the highway system, the railroad system, etc. Deng Xiaoping recognized that and saw that, that was the vision for China.

And with that I am going to turn it to Romeo.

Romeo Dator

Thank you, John. I think what we are going to do with the webcast really is, we're going to focus more on the China middle-class. And we think that's fairly timely at this point, because you've read into the press quite a bit about the US orchestrating. Now about the Democrats, and the increasing pressure they are actually putting on China, does not only revalue their currency, but actually increases their imports and one way they can actually increase their imports is actually by increasing consumer consumption, and their domestic basic discretionary purchases.

Although the numbers might differ a little bit, we are defining the middle-class here as people who have assets between $10,000 to $30,000 and annual incomes of roughly $5,000 to about $30,000, its currently estimated that this middle-class numbers 59 million people in China and it is expected to actually grow by 2010 to about 100 million people.

And while you may not completely agree with the numbers, and you may read different numbers, what you really can't argue with, is that there actually is a growing affluence in the country and I noticed each time I go there, you see a lot of malls being built, a lot of stores being built. They are basically destroying all their classic houses, and actually construct new high rises and that's really a course of contention there, because it’s really some of the poorer places when they are doing this, and that actually goes against their whole idea about having a harmonious society. We'll get into that a little bit further.

On pages 4 and 5, we have the key findings of the study of the middle-class. On page 4, we can see on the first bullet there, that the average middle-class family saves 20% of their income. They actually have goals in mind when they are saving this income. This is actually down from as much as 40% from a few years ago. So, it's clear that, while they are very good savers, and they’re saving quite a bit of their money, they are actually starting to spend a little bit more, and I think that bodes well because the intent is not only to have them starting to spend more, but their intent is, in the future, that they will spend even more, so that discretion becomes a bigger part of their GDP and then opposed to being only one-third of the GDP right now.

Second bullet point, 65% of their families own a PC. It's very important in China for kids to be very technologically savvy, so that’s a little surprising there. That compares to about a level of about 60% here in the United States, where 60% of the people actually own a PC. But it’s a little bit behind Korea, as well. Korea is much higher at about 75% of families owning PCs.

The third bullet point shows that while 60% own their own home, only 17% took out a mortgage. This really speaks about their level of savings that they’ve had in the past. There are a lot of people who have actually been able to pay for their apartments, or their houses, basically with cash, and didn’t actually need to borrow money to buy their house. So, I mean that really speaks quite a bit to the level of savings that’s actually available over there in China.

Turn to page 5, and we see that 30% of families have a credit card. And we'll take this a little bit further, I think it is a big step, because when you have a credit card, you are probably much more likely to make discretionary purchases. So, as that level actually starts to grow, we think that the amount of discretionary spending will grow, as well.

20% have actually bought funds or equities in the last twelve months. It's obviously surprising, given that the Shanghai Stock Exchange has more than doubled in the last twelve months, and the intention is for those who haven’t bought any funds or equities, that more than one-fourth had not planned to over the next 12 months.

In the final bullet point, there in terms of key findings, 44% plan to travel outside their home provinces in the next year. A lot of the travel actually takes place in China, very few have the desire to actually travel outside of China, but the cities are so different over there, in that it actually almost -- it is sometimes, if I go through a different country, when you go from one region to the next.

And with that, we’ll go ahead to page 6, taking a look at the middle-class a little bit more closely. Page 6 shows a breakdown of middle-class in terms of per-capita disposable income. In 2006, the average per-capita disposable income was about $1700. That compares to a level of about $32,000 in the United States.

One thing I will say for the Chinese, that in terms of being a homogenous people, they are not very envious of people who have something that they do not. What they really want is the opportunity. So, if they don’t have that licensed car right away, so long as they are given the opportunity to possibly buy that car in the future or buy that bigger house, they’re satisfied. And that’s something that the government over there is very aware of, and they try to give people as many opportunities as possible to actually move up that social scale and it's actually starting to happen as we see more and more people entering the middle-class and people entering the upper middle-class. So, I think that probably bodes well in terms of keeping the harmonious society going forward.

We'll move on to slide number 7, as this ties in a little bit with the other slide that John referred to on page three, where a lot of the tax free zones were actually on the coast, and as you can see as a result, that's where the people tended to move. You can see that, what's marked here are the cities with population’s over 1 million and these aren’t even all the cities in China.

It just represents 57 cities. They were actually surveying for these findings, so they basically surveyed families in these 57 cities with the population of over 1 million. China actually has a 150 cities with a population over 1 million people and that compares to only 36 in Europe and only 9 in the United States.

It's actually funny hearing people speak in China, when they talk about a smaller city having only one million people. In the United States, as I've heard, it's just half as concentrated, and the population tends to depart to those areas where the opportunities actually are.

We'll go on to page 8, and we'll see what people actually do with their household incomes. As we can see on that pie chart, 80% of the annual income is actually being spent, and 20% is saved. As I mentioned, this is one of the key findings earlier, and of the 80% that's actually spent, one-fourth of that goes towards education and housing.

And as kids get older, actually that 15%, that's actually spent, tends to go up because it gets more and more expensive as kids get older, and there are more activities that they actually want to take part in. The 23% they use for groceries actually also includes dining out. On average, middle-class Chinese families dine out about two times per month.

What's surprising is the little amount they actually spend on healthcare; only 5% of the annual income is spent on healthcare. But part of the reason is that a lot of the middle-class is still fairly young, so medical expenses aren't a big concern right now. But it is something that you save for in the future, and we’ll go over that a little bit later on in the presentation. One-fourth currently have no health insurance. So that's definitely a concern going forward, as these couples get older and these families get older.

On page 9, this is our breakdown on what people are actually saving for. The 20% that they actually do save; one-third of it actually goes towards healthcare and retirement. As I mentioned, most people don't have healthcare insurance, and as you get older, that could potentially be an issue because just one catastrophe and the others could basically wipe out your net worth over in China without that insurance, where timing is also a big concern there, because in addition to healthcare there is really no closer security plan per say. So you are basically on your own for your retirement.

So one [part] of the same is actually devoted towards that. Another [part] is actually for housing, and it’s not necessarily that they want a second home. But in China the tendency is for parents to actually help make down payments towards their kids’ first house or perhaps the only house in their apartment. So that's something that they have to save towards as well.

As you can see their one-fourth goes towards the education. Education is just very important over there. A lot of spending by the middle-class actually goes there, just to keep their kids competitive with everyone else within that middle-class.

We'll now move on to page 10 with some housing statistics. You can see there that China, 60% of the middle-class families that were surveyed actually owned their own homes in 2004. And of the fully 40% of those that actually own homes, they actually paid with the savings that they've been doing all their lives, and they have no mortgage as a result of that.

17% of the home owners do have a mortgage, and about one-fourth of them are actually living either in their parents' house or a house that their parents actually own. While that 60% figure is fairly high, it's not quite as high as United States which is 69% and Germany at 40%. But housing is usually the first discretion, the first big ticket item in terms of discretionary expenses that people actually strive for. And you can see in terms of the middle-class, almost two-third of them actually have their own home now.

On to page 11, now that you have your house taken care of, usually the next thing you are looking for is an automobile. But surprisingly 59% of families still use public transportation. And that's either in the form of the bus or the subway to get to work. And another 23% still use bicycles, and that's actually surprising. When I was in Shanghai there were still a lot of people who biked to work. You can even see people late at night who are biking from work or [biking] perhaps in some cases late at night.

Surprisingly though, only 8% of all the families surveyed actually only their own cars. And of that 8%, about 30% of them actually bought their cars in the last 12 months. So it’s something that's a fairly new purchase for them, but we will see later why that actually is the case that only 30% actually, or only 8% of the families own their own car. Part of it is that they actually don't want to incur debt, and they are actually saving towards the car. So when they buy the car, they can basically pay for it in full.

On page 12, we have more statistics about automobiles, 17% of the families explained have bought a car within four years and 7% are actually saving to buy a car. And it’s actually when they were asked how they were going to pay for the car, only 59%, more than half, said they plan to pay cash for their car and not actually take on a loan. Beyond that 41% were basically going to pay for as much as they could, but they would take out a loan for the difference.

The next two pages basically are their [technical] items that we in the United States basically take for granted, but are somewhat of a big deal for the families in China. On page 13, we have the PC ownership, and we could see there that almost two-thirds of the middle-class families own at least one PC, 65%.

And what's surprising is that of the people that own PCs, 31% actually built them on their own. In other words, they are not actually brand name PCs’, they have actually bought the individual parts and put it together themselves. And of the top selling brands, the top two there, Lenovo and Founder are basically Hong Kong companies, Lenovo basically by the IBM PC making business. The one name you'll recognize there with third place in terms of our favorite brands is Dell. But as you can see as well, that AT&T, Hewlett-Packard and Samsung are also big seller of PCs, but by far and away really Lenovo is the big winner here.

On page 14, we see, in mobile phone ownership, the penetration for mobile phone ownership is fairly high in China. It's over 67% currently and as you can see, most of the families -- only 1% actually don't own mobile phones, and most families actually own two mobile phones. With the top brands being very familiar names, Nokia, Motorola, and Samsung, because at some point, often these companies have targeted the low end phones to very inexpensive phones and they have quite have actually been able to gain market share at the expense of a lot of the domestic players, but it is really the domestic players that force the hands of the big three, Nokia, Motorola and Samsung to actually introduce the low end phones that are very cheap in price because they started introducing very cut throat pricing that brought prices down and made mobile phones much more accessible for the middle-class.

And in terms of why people actually own more then one phone, it's not just that the mom and dad have a phone, but the way it works in China is, if you are working, if you live in one city and work in a different city, the only charges tend to be cell owners over there that it's much cheaper to actually have two different cell plans, one in the city where you work and one in the city where you live.

So, often times when you are traveling, you see people with two, maybe three cellphones and that's because, since they travel so much, it's better for them to actually have one cell phone for each of the cities where they tend to be, tend to visit quite a bit so, its so much tiring to see people actually with multiple handsets.

Page 15, credit cards. I think this bodes well also for this discretionary spending going forward. 30% of the families have at least one credit card and 85% have one debit card and a lot of the people actually start to use their debit cards for discretionary purposes, in other words they are shopping with their debit cards and actually their next step is there, to actually apply for credit card and actually using that too make discretionary purchases. So, I think at that level I'll get higher, I think and it is actually good to the economy overall because that discretionary spending should pick up, because it is much more tempting to buy something with credit card than with cash. You probably are less likely to apart with cash than you want to do something like the credit card.

And in page 16, in terms of Travel Plans, as I mentioned, most people who do plan to travel in the future actually will stay in China to do that. Some of the preferred destinations are Beijing, Dalian and Qingdao, I have actually only been to Beijing, they actually had a chance to visit some of the other sites, but I've also been to Shanghai as well. And it's really interesting that a lot of people really still have that much interest yet to at least travel outside. Only 2% actually are interested in traveling overseas and one of the top spot there was actually Thailand.

So, but I think, going forward that will probably change as people have already visited Beijing, lets say or Dalian perhaps so, [was a venture] to the United States or Europe even going forward. But, I think that’s probably something that’s a little bit further down the line.

On page 17, we'll see how much pressure there actually is on kids in these next two slides. And I think part of this is the whole one child policy as a result of that. This is somewhat akin to having one lottery ticket, you are hoping for the best for that child that you can actually do very well now only, its open in his career because that's actually very good for US family because at some point if that child is probably going to help support you as a parent, as well as, perhaps grandparents and there will be other siblings if they happen to have some. But 70% of the children aged above 3 [Technical Difficulty] we could see that the cost have actually raise back in child it doesn't actually stop with the college.

As you can see here, the total cost of actually raising a child and this isn't just in the cities of Beijing and Shanghai, it is close to $95,000 and as you can see this timelines right now, this starts with pregnancy and ends with the down payment of the house for your child, a lot of the expenses actually come after college.

Basically, on average you are still supporting your child three years, after they graduated from college at a cost of $58,000. Wedding would cost $65,000 and the down payment on a house or an apartment $26,000, so, quite a bit of it.

Whereas, in United States, a lot of the expense for raising a child actually probably ends with college and in China, it's still quite a bit to go after their college. So, at that point of stage, as much as they do and a lot of the savings when they said that they are actually saving for a house it is not for themselves as you can see here, it's actually saving for the down payments for their child, when they get married and go off on their own.

Now, I spoke earlier about harmonious society and that's one of the goals, that's actually a craze that regions how actually introduced, when he introduced since the current five year plan that runs through 2010. And basically, the whole idea there is that, he realizes that there is a wrong disparity between the rich and poor in China.

And the middle-class have a lot of the same concerns as some of the poor people in China, and some of these concerns are actually outlined on page 19. The biggest concern is unemployment. And the reason that is the concern for a lot of these people who actually have jobs is that, by 2010 it’s expected that in the bigger cities there will be 50 million new workers who have entered those cities, but only 40 million new jobs.

So, that basically means that the current unemployment rate of about 4% most likely will be going higher, going forward. So that’s why its very important for our kids to basically have the advance skill sets of being on the PC, being able to speak English or whatever or math skills. And that’s why there is so much emphasis on education because the competition for jobs going forward will be fairly intense.

Our healthcare’s another big concern. As I mentioned, one-fourth of people have healthcare coverage, but 75% don’t. And as a result of that, as I said what kind of stock you own is basically what value is your entire net worth. So, that’s definitely a big concern there.

On property prices, this is really a bigger concern in the first tier cities, the top tier cities like Beijing and Shanghai where property prices have just basically gone through the roof and housing there really is not affordable for the middle-class. In some of the second tier cities property prices are going up, but they are not at the outrageous extent or at the outrageous prices that you see in Beijing and Shanghai. So that is a concern going forward.

But I think the other big concern is retirement, number four they are at 14%. We mention that as a big worry. Without any sort of social security system, when you retire you are basically on your own. So, saving for retirement is a big issue there as well.

Let's see, on page 20, we'll address the healthcare issue a little bit further. In terms of mandarin that phrase (inaudible). That basically means that healthcare is hard to get, but when you do get it, it's very expensive. And that’s really the big issue there, is that basically that there is very insufficient healthcare service available to the average person, the average family, and when it is available it costs quite a bit of money.

And the government has basically admitted that there’s been insufficient investment in healthcare and they have started increasing their healthcare budgets. Basically in 2007, the plan was to increase healthcare spending by the government by 80%, which seems like a lot, but we are starting from such a low number that 80% really isn’t that much.

But making healthcare affordable is probably one of the key issues that President Hu Jintao realizes as necessary for a harmonious society. So this is definitely an area of concern for the government, something that they are definitely addressing and will address further going forward.

On page 21 and 22 basically we have another concern and that’s the Asia population in China. And really out from this stuff, we will not go over all [these] charts in detail. But the idea here is that right now with the population of 1.3 billion people, China is accounting for one-fourth of the world’s population.

However their population is not growing as fast as the other countries in Asia. So basically what this means that by 2017 China’s population should peak. The number of births is currently about 30 million people, 30 million babies are born per year in China. And currently 43% of the population is over the age of 40. And by 2015, it's expected that, that 50% of the population will be over 40.

So while China overall is 25% of the world’s population, 30% of its population is above 40, and only 21% is under the age of 25. So, this actually basically has long-term implications in terms of government resources. Because that means in the future you're going to have fewer earners, and basically more people demanding services from the government. And that's something that is a long-term issue in China.

We'll end on page 23, and we'll end on a somewhat hopeful note. These are their desired occupations for children that parents have for their children. As you can see that’s out there doctor, a professor, government officials, entrepreneurs and lawyers at the top of the scale there. And with education levels improving, I don't think this is really out of the norm or out of the reach of the average child in China.

With that in mind, I think if they are actually able to become or hold these occupations, I think that actually bodes well for the long-term growth of China, because I think this basically means that you've going to have higher productivity per worker as a result in some of these occupations.

And if you have higher productivity per worker, I think that basically means that China can remain competitive in terms of GDP growth rates with a lot of their neighbors in Asia. And I think that’s basically is hopeful going forward for China, as well as the kids in China and the pressures that they actually face. And that’s basically a quick look at China's middle-class.

I'll turn it back to Michael to see if they have any questions.

Question-and-Answer Session

Michael Dunn

Thanks Romeo. Just a reminder everybody, if you want to ask some questions, please click the, ask a question link on the left hand side of the screen, and that comes directly to us. On page 24, you see the 135 and 10 year records for Romeo's primary fund the China Region Opportunity Fund. And with that let me start with the first question. Romeo please comment on how the Chinese government might continue to deploy their very, very large reserves that they did recently in making investment in private equity company here in the United States?

Romeo Dator

Yes actually, the Chinese government actually set up a group. It's called the, let me see, it is the state-owned investment corporation, SIC, -- it's the SIC and basically what their finding is to actually take part of Chinese Foreign Exchange Reserves and actually buy strategic assets overseas and we think that actually is positive for alot of the resource companies not only in the United States, but also in Latin America, in Africa because what they are going to do is, they're going to take 20% of the excess reserves each year and give it to the SIC to invest overseas and that’s how they trying to actually draw down part of that trillion dollars that they have in Foreign Exchange Reserves.

Michael Dunn

Great, thank you. According to Warren Buffett, 30 of these 33 largest Chinese companies, majority owned by the Chinese government, what do you think of that ownership factor with respect to equity ownership through a mutual fund in either the mainland or Hong Kong?

Romeo Dator

Actually that is a very good question but what's happening is governments are actually, or what the government is doing is what they tend to do is, you still have that state-owned corporation and one of the subsidiaries tends to be a listed company either in China or in Hong Kong. And in order to realize the value of the assets owned by these state-owned enterprises they undertake a company called an asset injection which basically means that our listed company, let’s take for example, China Mobile is not a good example.

Well, let’s take the Sinopack, the refinery in China. Basically they have a parent company in China, that's state-owned by the government, and what they will basically do is they will take, they will allow the listed company Sinopack in this case, to buy assets very cheaply, in some cases pennies on the dollar and inject that into the listed company and in this way basically what the government is doing is they are reducing their holdings and basically realizing value for the assets that they currently own. So, while that is currently a concern, I think that they are actually addressing ways to actually reduce their ownership of a lot of assets that actually isn't listed, it is not formally by IPO, but by actually doing this through not listed company that's subsidiary of the state-owned enterprise.

Michael Dunn

Very good, thank you. It would be rather, remarkable savings rates of the Chinese in general, and the middle-class as we've outlined here. What is the future for, asking you to be a fortune teller in some respects here, Romeo but, how does the Chinese consumer truly emerge as a consumer, as we know consumption here in the United States, will they clearly ever approach the standard of consumption that we equate with, first to the mall for example.

Romeo Dator

I said, we will. I think, what we really need to have is, we need basically the next generation to take over in terms of having, being the primary earner in the family, and I think you will start to see that more and more because, I think that people that of the current wage earners in China, basically grew and if someone that came to the US, your grandparents grew through the depression, so they tend to disable little bit more and probably the current generation of Y, didn't really grow up in those traumatic times, though, spending to them is not a big of deal. I think, when they get their version of generation Y, I think basically you will see, consumption become a greater portion of GDP because they never really grew up in tough times, so they really don't know, they don't see the need to save. And, I think, as a result of that, I think, that consumption will really pick up, but that's a longer-term plan, and I think that happens in the next couple of years. And I think, this is what frustrates the US Congress quite a bit, is that, when is it going to happen? And I think, it is going to take a generational change, but I think it will happen.

Michael Dunn

Because there is a question that, there is actually, I am seeing quite a few variations and it's no surprise, what you make of the current volatility in the Chinese market and what's the read on that?

Romeo Dator

Well, I think, we were definitely over bought, and I think the one thing that the popular press does not do, is they don't really differentiate between the different between the different share classes in China, you have basically, and the most volatile has been the Asia market and that's something the China Region Opportunity Fund does not partake in, because that's really more or less limited to Mainland Chinese institutions and individuals to invest in that market. And that's really the market that has more than doubled in the, over the last twelve months.

You also have the B share market, which is open to foreigners, but it is a much less liquid market and you have the A share market, which is basically the same chinese companies, but they are just listed on the Hong Kong Stock Exchange, and the reason they are listed there is, there was just more liquidity at Hong Kong at the time of the listing, so they preferred, we have to go and it's really, when they talk about a market bubble, they are really referring to that Asian market, because the average PE or the stock that trade on the Asian market, which again, we don’t participate in, its over forty times 2007 estimates.

And what we are doing is we are buying that same company one share of stock on the A-share market in Hong Kong and selling in some cases as much as two-thirds discount to that same share of stock that trades on the Asia market, but we are buying it in Hong Kong. We are buying in a much more attractive multiple perhaps as low as thirteen or fourteen times more than it’s trading 40 times in China.

And maybe, what you are seeing is that you are seeing the bubble in the Asia market and that's really where it’s been most volatile. That granted, when the Asia market does sell-off there probably will be some volatility in the A-share market in Hong Kong. But since it didn’t go up to the same extent as the A-share market last year or over the last twelve months even, the down side will be much, much painful, and you are actually getting the same assets at a much more attractive valuation.

So, I think you will get continued volatility in the market just because the A-share market definitely extended, but when investing in the emerging market in general, you need a longer perspective. And really these sell-offs I think given the level of the liquidity that’s out there, and some of the government has actually taken to get people to invest elsewhere. I think that actually bodes well for a market like Hong Kong or Singapore or Taiwan or even Korea, that’s because assets, since they not allow to leave the mainland, that means people don’t only have to buy the A-share market, however the A-share stock, they can actually invest elsewhere.

And if we could buy the same stock in Hong Kong for one-third evaluation that you can in the mainland, why would you buy that stock in Hong Kong. And that's why we are positioning the portfolio in those A-shares, because we are basically buying that same asset at a much cheaper level.

Michael Dunn

Great, thank you. With the type of growth that's been well documented, it seems double-digit 10%, 11%, 12%, year-in, year-out, year-over-year, could you also comment on the future of Chinese energy needs and how they are addressing them and how close they are to satisfying their long-term, desire and need?

Romeo Dator

Definitely, I think growth will still be very close to double-digit for a while here. I think you'll probably see 11% GDP growth in the second quarter once again, just based upon the [stats] of PMI index these first couple of months of the second quarter.

But I think, longer-term, the economy there I think will still grow at least 7% to 8% over the next five years. And in term of energy demand, I think what you are seeing is, why they are cutting all these deals and why they are actually devoting 20% of the assets, or they [access] foreign exchange reserves towards buying assets overseas is, they can’t produce enough within the country, so they have to go out there and buy it.

And that's why I think, not only the fund but the [complex] as a whole is fairly bullish on resource stocks, in general over the short-term, intermediate term and even longer-term, just because to satisfy the growth not only there but also in India. Basically they’ll have to buy somewhere. So we think that's still a very good place to be. [Agreed], it’s a volatile market to play a lot of these commodities and finding devaluated stocks. But if you hold on, through the ups and down, I think in the long run, you are basically ahead of the game.

Michael Dunn

A different question that’s actually related to that specific point, the very large scale growth. At what point does the growth in China bump up against needs to address environmental issues, global warming, etcetera?

Romeo Dator

That’s something there someone addressing right now. There’s a list of mega trends that are actually occurring in China. I think reversing environmental degradation is actually one of them. And then not only air, but also water and land. And the government is taking slow steps, but they are taking steps towards actually reversing the increasing amount of pollution they are actually creating. Because they realize that it actually is -- there is a cost to that.

It was estimated that in 2004, it would actually cost 3% on GDP. So, the country is definitely making some progress on the issue, and they are starting to punish some of the offenders. And basically what they are doing is that in some cases closing down smaller coal mines, smaller smelters, because they tend to be some of the worst offenders in terms of creating pollution.

And that’s one step they are actually doing by consolidating] some of these smaller players against some bigger companies. That’s one way they are actually addressing this issue, and they are slowly producing quite a bit of pollution but they are taking steps for actually addressing the issue.

Michael Dunn

And as a last question here we are actually asking you again to tell about the future a little bit. As the agricultural economy gives way to the rapidly growing surface economy, and folks from the country side are moving into these very rapidly growing cities, what does this do to sort of the social fabric and culture of China that has been storied for thousands of years?

Romeo Dator

Very good question because that’s an issue also that’s being addressed in the current five-year plan, and it's the realization. Basically you saw a lot of people who basically are farmers living on the farm. And it's going to be a rough transition for them as basically as their agricultural part of the economy becomes a smaller part of future plans.

But I think by basically giving them options by either providing them with healthcare or providing their kids with more education or providing them some sort of [close] security like payout that, that actually will ease the transition somewhat. And I think since a lot of the people actually live vicariously through their kids. So long as their kids have a better opportunity to go forward, I think it’ll probably be a little bit easier to sell that whole idea to the farmers than it would be other wise.

Michael Dunn

That’s great. Thank you very much Romeo. Thank you, John. This concludes today's webcast. We want to thank you for your participation, and also invite you to look for the slides from this webcast available on our website www.usfunds.com in the coming week.

While you are there be sure to register three weekly email news letter the Investor Alert. And if we maybe of additional help please feel free to call us at 1-800 US-FUNDS, that’s 1-800-873-8637.

Once again thanks very much. Take care.

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U.S. Global Investors, Inc. is a registered investment advisor that focuses on profitable niche markets around the world. Headquartered in San Antonio, Texas, the company provides advisory, transfer agency and other services to U.S. Global Investors Funds, U.S. Global Accolade Funds and other clients.

With an average of $4.83 billion in assets under management for the quarter ended March 31, 2007, U.S. Global Investors manages domestic and offshore funds offering a variety of investment options, from emerging markets to money markets.

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