Bullish on China After My Recent Visit

Includes: CAF, CHN, FXI, PGJ
by: Jeff Farley

Everyone seems to have an opinion on China - their people, the government, the economy and the markets.

After reading so much about it, I decided to invest the money and time (2 weeks) to go see it and feel it for myself.

  • My favorite part of the trip was most definitely the people. They could not do enough to help even if they did not speak much English. They seemed amazingly happy everywhere I went (and I ventured away from tourist spots as much as I could).
  • At the brokerage office I visited in Beijing (2 times), I asked how many brokerage accounts they were opening a day. The answer was about 100. This is down from around 300 per day 9 months ago when the Shanghai market was soaring.
  • Don't believe everything you hear in the Western media about Tibet. There is another side to the story for sure. Some would argue that much of the Western media seems is as biased as the state controlled media in China.
  • It sure didn't feel like I was in a country where human rights where being violated in a meaningful way. In fact, these people seemed so darn happy and proud of their country and government that is was a noticeable difference to most people's feelings toward the U.S. government.
  • The true strength of China is the will of the people to lead a better life. Construction workers work all night long in the rain, cab drivers beam over a $2 tip, and business leaders from around the globe are coming to China to help them get even better.
  • Tourism is exploding among the Chinese people. My guess is 98% of the tourist places we visited where mainland Chinese people…not foreigners.
  • Hyundai and Volkswagen were the most prevalent cars in Beijing. Audi is the most popular high end car.
  • China is open and certainly gives the feeling of welcoming visitors with open arms.
  • The literacy rate in China is a surprisingly high 86%.
  • China's advantage is not just cheap labor. It is Chinese peoples' skill level and work ethic that is most important to them having a major competitive advantage in the global market. Think about it, there is plenty of cheap labor in Africa, India and other Asian countries. The problem is, these countries lack education, infrastructure, energy, and the skilled workers needed to make the best products the world demands.
  • Most of the wealth in China is in hands of 45 year and younger age bracket. Let's call it "new money". This is a stark difference from the U.S. (and the rest of the developed world) where most of the money is old money (older folks have most of the wealth). What this means is the younger people in China do not resent the rich; they look up and aspire to it. This is the exact opposite of what it is becoming like here in the U.S. where there is major resentment on the rich and a war on them by the politicians.
  • While Communism is the political party in China, it is most definitely NOT the economic system. In fact, I can comfortably say that China probably has more dynamic entrepreneurs and capitalistic people than any other nation in the world.
  • It is pretty clear that the Chinese government gets things done efficiently and quickly (a huge contrast to the U.S where it seems nothing can get done anymore). Once a decision is made; things move and progress is made. This means roads get built, airports get built, schools get built, power plants get built (nuclear included), factories get moved, taxes are cut or raised, safety measure are put into place, corruption is weeded out etc. Granted, no country is perfect and some people will correctly argue not enough is being done about things like pollution and piracy…but they are moving in that direction.
  • I would describe the Chinese government as similar to the parent of a teenager (which is kind of where they are in their economic development). They allow a lot of freedom but there is also supervision, direction and strong decisions made for the good of the country and the masses. The way I look at it is, parents are not violating human rights when they tell you your curfew is midnight, or you must go to school, don't do drugs, cut your hair, you cannot get a tattoo till you are 18, don't drink and drive, you cannot drive the car if you flunk out of school, or you better not get your girlfriend pregnant.
  • Regarding development - if your very dear, old run-down home in the city is chosen for a new high rise or expressway, you are given cash to move to another place nearby, or you are given housing far outside of the city.

On a scale of 1-10, this trip was a 12. My girlfriend never really wanted to go to China (she is a Europe gal); now she cannot wait to go back - and neither can I.

I am extremely bullish on the Chinese people (and thus their markets) for the long term.