Ilan Babaji's  Instablog

     People’s Republic of China… We have Hong Kong, Macao, Inner Mongolia, Xinjiäng along with part of Gänsú and Qinghai, and the Tibet; completely different from each other. Also very different from the general and most popular identity in China, which consist on the center and east of the country (with its giant cities as Beijing, Shanghai, Xi’an, Chengdu and Guangzhou, among others). People, cultures and territory are different in each of these sectors. Among all form this little monster called China.

     From the standpoint of investment analysis, the western world (and China) have spread to Hong Kong and Macao from the People’s Republic. For both Hong Kong and Macao can relate more with the west than the east (each with its particular history: the British Empire colonizing the one hand, the Portuguese colonizing by the other side). China is aware of this, and in some strange way two small countries live within the large country, and they have marked strengths independence in politics and economics –specialists in the matter will sorry myself for not yet fully understand how it works the relationship between China, Hong Kong and Macao (and Taiwan!)-. So... on the other side is Taiwan. From what I understand Mao won civil war and established the People´s Republic of China, and his opponent, at that time the Nationalist Party leader Chiang Kai-shek, who was president of the Republic of China moves to Taiwan. Anyway I still a little confused about all this…

     Before starting my trip around Asia I knew that there is an ETF for Taiwan, another for Hong Kong, another (many) for China. Separately. And I knew that investors are more confidence to invest in Taiwan and Hong Kong that in China. What I didn’t knew until have traveled around these places is that Hong Kong is just a financial center (the most impressive structural one I’ve seen so far), and Taiwan is a small country farm, full of industries… or offices of the industries with plants located in China. Of course it’s better locate offices in Taiwan, the products from there (who are mostly from China) are considered of better quality than Chinese products. About Macao… I can say this place is Las Vegas of the east.

     And from here lets go to China. A country that grows and grows, the center and east of the country with business and industries already in place, and the surroundings (countries within countries) as Xinjiäng and annexes, or Tibet, are still rural areas with little industry and commerce, but with also a potential giant ditches of cheap labor force to continue supplying the little monster that keeps growing. China has been installing market-oriented reforms and huge investments in infrastructure, which act as driving forces behind the impressive growth of China (and its great economic performance). I’ve seen them build so much! And this is far from stopping, the works are everywhere and the government does not waste time worrying in upcoming elections, political lobbies and trade or fiscal deficits. It is a worker government, projecting and advancing its future growth process. And his people are a people with a very similar view. So here we have a government and people with a culture of saving and make smart investments. China is growing, improving step by step the standard of living of all the people of the country. Is also opening the economy. Now is experiencing an interesting transition from an economy led by the government to an economy driven by the market. And top it off is soon to overtake Japan and become the second largest economy in the world after the U.S. (according to Goldman Sachs the GDP of China could equal the United States one for 2027).

     I will write to you a great summary of China’s situation through educational and functional bullet points:

·      20 years ago China’s economy amounted about 2% of the world product. Today it represents nearly 8%. It is a growing economy and contributes significantly to overall economic growth.

·      The poverty rate has dropped steadily for almost 30 years. The World Bank says that today 10% of Chinese people live with less than 1usd per day and in 1984 it was almost 40%. Of course we should see that was the purchasing power of the dollar in China many years ago.

·      The share of expenditure of household income allocated to food went from 50% in the `80s to almost 35% today. This shows that the purchasing power of the family pocket is improved, offering the possibility to save more and improve the standard of life.

·      China is a large opening pro-market economy: the percentage of ownership of industrial production by public companies was more than 80% 30 years ago, with a tendency to privatize and open up to foreign investments, that rate become today around 20%. The same with investments in capital, from more that 60% to the actual 30%. China is, step by step, deregulating economic restrictions and freeing prices.

·      Another interesting feature is the migration within the country; the rural population decreases in coming decades (urban population growth). In the early ´80s the rural population consisted almost in 80% of the total population, and today that rate is about 55%. The same applies to the primary industry, from composing more than 30% of the GDO to be almost 10% today.

·      The national savings rate grew and grew, from less than 35% of the GDP in the early ´80s to over 50% today.

·      Some smarts investments: railways increased from just over 50.000km to 80.000km in length in almost 30 years, and the Chinese government built 60.000km of the express in the last 20 years.

·      From the business perspective: exports increased from represent about 5% of the GDP in the 80´s to around 30% today (today the number is around 28% and one year ago it was almost in 38%), while imports increased from represent about 5% of the GDP to be now a little over 20% (a year ago almost 30%). China accounts for more than 9% of the total world exports. As a destination for these exports is falling the G7 and growing emerging markets.

·      One of the weaknesses (of course can not be all positive): China depends increasingly on commodities that she has not. Of not needing to import oil only 15 years ago, now the oil imports of China represent over 40% of what she consumes. Only 5 years ago China was a net exporter of coal and now she is a net importer (growing by leaps and very fast). The situation is also worsening in steel and copper. As far as the government tries to generate the decrease of energy dependency on these resources and yet alternative energy sources grow slowly (but they grow), such as wind or nuclear energy.

·      Another weakness is the degradation of the environment. Four decades ago China used to represent 5% of the total emissions of carbon dioxide in the world… now that number is bigger than 20%. Investments in regard to solve this are growing year by year, but still do not see results.

·      And finally, China is the victim of an evil, and the globe suffers by the same way: the gap between rich and poor. The per-capita income and living standards have been growing year by year, but the income gap is growing equally.