China's Stock Market Investor's

The Shanghai stock exchange experienced tremendous growth in 2006 and 2007. During those years there were more IPOs in Shanghai than in New York.

The Shanghai exchange IPOs were primarily state owned enterprises. The Central government encouraged these IPOs in order to encourage these state owned enterprises to raise capital that could be used to reduce the government subsidies for those enterprises. This subsidy reduction for the central government released capital for other uses.

At the same time individual and institutional investors were encouraged to buy stocks through brokers. The market heated up and the market rose to more than 6,000 points at its highest. Investors felt the market could only go higher because they had never seen a market downturn. Brokers and analysts encouraged this wave of investing as well.

The majority of listed companies did not have transparent financials. There was not a system of objective stock analysts judging these companies so individual investors continued to buy.

Many investors sold their homes and other assets to invest in the market. many believe the bias toward gambling among many investors fed this wave of investing as well.

In late 2007 and early 2008 the market began to drop rapidly due to poor earnings and a general slow down in the economy. Individual investors began to loose huge amounts of capital. They did not have balanced portfolios but instead were fully invested in the stock market.

The net result is that the objectives of reducing subsidies was achieved on the back of indidual investors. The China Daily survey below demonstrates the impact of these losses.

The lesson from this calamity is that bubbles burst and when they burst everyone gets wet !

Toasting - Joining The Group

Anyone who has entertained or been entertained in China has come across the toasting ritual.

Toasting in China is a way to create and receive "face" from friends and colleagues. By toasting your friend or colleague you are asking them to partake "first" which allows you to then drink your beverage of choice. Rarely do people sitting around a banquet table drink beer or wine "by themselves." It is more appropriate to drink in pairs or in groups than by yourself. Solo drinking is viewed as selfish and impolite.

At a banquet table the host always sits in the seat facing the door. The most important guests sit to his/her left and right. The host must wait for the banquet's choice of beverage to be poured for all guests before he/she raises their glass in a "group" toast which signifies the meal has begun.

Once the meal is underway the other guests will toast the host to show their appreciation. This is a direct toast with the host. Each person at the table should toast the host beginning with the most senior guest and continuing until everyone has completed toasting the host.

Then everyone is free to toast the host's friends and colleagues. Usually the guests do not toast each other unless they are meeting for the first time. If they do toast each other it is done at the end of the meal or done discretely.

Usually the waiter or waitress keeps the glasses full during the meal - usually small glasses. This is important in order to always have the opportunity to toast someone in case you yourself want to take a drink !

It is important never to be "cheap" with liquor at an important dinner in order to make sure everyone is enjoying themselves. One does not have to drink excessively but one needs to participate in the process.

Depending on who the host is determines how much one must drink each time. If the host is a good drinker then both parties usually drain their glasses on each toast. Women are usually exempted from this requirement if they declare up front that they are not "real drinkers."

The meal is usually closed by the host raising his/her glass to everyone as a group and draining the remaining wine or liquor so as not to leave anything to waste.

Regardless of one's ability to drink it is important to participate in this ritual so as to be brought into the "group" and make friends.

Good luck !

Merry Christmas From Shanghai

Merry Christmas everyone !

Christmas Day in Shanghai is cold and overcast this year. No snow but lots of cold weather.

The city does not stop for this holiday although it has become a day that most Chinese acknowledge as a holiday (without the religious celebration).

Local Chinese celebrate Christmas by going out for dinner with friends and then going to sing songs together with friends. It is more of a reason to have fun than a holiday that has western Christmas connotations.

We're all hoping for a better New year in 2009 than we had in 2008 !

Merry Christmas and Happy New year to everyone !

Inside - Outside: 外面跟内面

Traditional Chinese courtyard architecture is characterized by a courtyard layout. The outer walls of the courtyard encircle inner courtyards with separate smaller courtyards for different members of a family's generation tree.

The outside walls when seen from the street or alleyway look inconspicuous and many times downright rundown. it is unclear what lies behind the walls - inside the courtyards.

The main gate of the courtyard is also a barrier to outsiders and bad spirits. Immediately in front of the main gate on the inside is a wall which blocks the visitor's view of the inner courtyards. Entrance is gained by the side paths around the "gateway wall."

As with Chinese traditional architecture, Chinese culture is equally "walled" off from outsiders. Starting with the Great Wall of China and the traditional feudal city walls of pre-modern China, outsiders have found it nearly impossible to find their way to the center courtyard of Chinese culture.

We randomly wander the outside walls of the courtyard in search of an entrance way into Chinese culture. Most fail. The failure is caused by "Potemkin-style" images of Chinese culture. These are illusions based on historical complexity which remain intentionally difficult to decipher.

Doors are opened that lead to dead ends. Threads are pulled which lead to barren rooms without any explanation.

The first key available to most visitors to Chinese culture is the Chinese language. This key is available globally. It has been duplicated many times by both Chinese and foreigners alike. The key fits the culture lock and is often able to open a few doors. The challenge is that the copies of this key are not precise. Sometimes it works and many times it fails.

This failure is rooted in the tonal nature of the Chinese language. using the wrong tone can cause you to swear at your mother rather than calling her "Mom." Failure can mean selling your watch rather than buying a new one.

For those who are able to turn the culture key repeatedly in the correct manner forging the first wall of the courtyard is possible and has been accomplished by many people across many years. Entering the first courtyard is the essential fist step.

Once inside the first courtyard one is calmed by a sense of understanding and appreciation. While one sense victory and accomplishment, the next door is more difficult to locate. It is narrow and hard to find. It melts into the courtyard wall. its keyhole is not obvious.. In fact a traditional key will not open this door.

The door can not be opened by one person alone. The traveler must join a group by forming relationships in order to understand how the door can be opened. Forming relationships is a tireless challenge laced with false starts.

I once invited a friend to lunch. I was building a relationship in search of the key. A noodle shop came upon me and I invited my friend to have luch together. The noodles were spiced with hot Sichuan chili peppers and was delicious. The meal was delicious. I paid the bill and left pleased with myself.

Later I heard from a mutual friend that my lunch companion was insulted by the fact that I had only invited him to eat noodles - a very basic meal. The meal was not high end enough. I had not given my new friend enough "face." I had not offered an expensive or unique meal but only a basic meal.

My attempt at joining this group had failed miserably and the hoped for new relationship had crashed and burned. I was never able to recover from that day ! I continued my search for the next door....

Through trial and error one can eventually find the second door and solve the puzzle that produces the key to a deeper understanding of Chinese culture. It takes years to find the next door and open it. When opened the sense of accomplishment is tremendous. It is not necessarily embodied in one event - one transaction but is more of a process. Success comes upon you after you have crossed the threshold of the sought after door !

This process of entering the next inner courtyard continues forever. Locating and entering the inner most courtyard is a lifelong task that may not be completely achievable. Life is a journey. Understanding Chinese culture adds an exciting and challenging component to this journey.

When one views a tired and rundown wall don't be fooled that this is a sign of poverty or disrepair. The wall is the "outside" and does not represent what is "Inside."

President Obama's China Visit

With 30 days to go until the new president of the United States is sworn into office I have been debating with friends and colleagues which country President Obama will visit first after he is inaugurated and Senator Clinton is confirmed by the Senate.

The short list of countries currently includes:

1. United Kingdom - the traditional favorite

2. Canada - Essential to Detroit rescue plan

3. Japan - closest Asian ally

4. Mexico - a wild card nominee

5. China - Largest holder of US Treasuries

My logic for picking China as the first destination is based on the principle that you always visit your largest investor first - that means China.

If President Obama is serious about improving America's position in the world after 8 dark years under Bush then a visit to China would break new ground. it could prove to the entire world that Obama is serious about new directions --- he calls that change.

He can change the global game by demonstrating that a US-China global partnership could be friendly
and does not have to be confrontational. The US economy needs China's economy to keep expanding. China needs US technology and management know how. There is a natural match.

China built an industrial economy in 30 years. it took 100 years to accomplish the same level in the west. China also created 100 years of industrial pollution in 30 years. This is a GLOBAL GREEN opportunity for both nations.

Regardless of where President Obama goes first I'm sure it will be successful. A visit to China first would break new ground and set his administration's diplomatic direction - a direction of change.

Christmas in Shanghai

Today I took the subway to the XuJiaHui shopping district in Shanghai to see how consumers are bearing up this holiday season.

Christmas trees were everywhere - in every shopping mall lobby and in most big shops ! Chinese retailers have certainly learned the basics of promoting holidays as reasons to shop ! A new addition this year is deep market penetration by Hallmark cards. Their holiday card stands seem to be everywhere this year.

The crowds were as thick as ever. Shoppers were certainly out in force.

I visited the Digital Electronics Mall to find a small gift for our office "Secret Santa" party. I started negotiating with the clerk for a 40 RMB computer camera. I was not making much progress when a women next to me suggested that I should try the "financial crisis" as an additional reason to get a discount.

It worked I got the small computer camera for 50% off the offering price ! A total of 20 RMB or $3 USD.

So the moral of the story is that the economic crisis has come to China retail and it is now a legitimate reason to push for deeper discounts !

Globalization at its best !

It's All About Population

Anyone who has lived in China for any period of time comes to understand very quickly that the 1.4 billion populace is the fundamental issue that governs nearly everything.

This is a dramatic and very broad statement but it is true.

Regardless of what you want to do - buy a train ticket - ride a bus - line up for social services - get a cab - pay your bills --- there are always more people seeking the same result than you imagined. There are always people pushing in line to get ahead.

In 1980 when I first came to China 18% of the total population of about 1 billion lived in urban areas - that is about 172 million people.


In 2006 the urban population jumped to 42% or 577 million people !

172 million increased to 577 million in less than 30 years.

The total US population is 300 million as of 2007.

China's urban areas added the equivalent of the total US population to its urban areas in less than 30 years !

Of course many of these people moved into NEW urban areas built across China's provinces. Not everyone came to Beijing (17 million) and Shanghai (20+ million). The provincial governments have been building new "rural urban areas" to accommodate farmers moving off the land. This wave of urbanization will continue for many more years until China's urban-rural mix looks more like the US with the vast majority of citizens living in urbanized areas.

This is why investors and companies alike see so much potential in the China market. The opportunity to build a new consumer class in China is historic. Not since the urbanization of the US on the 1950s and 1960s has there been such an opportunity.

11 Hours 43 Minutes

Last night I took the sleeper train from Shanghai to Beijing. It is a non stop 160 KM/Hour fast express train linking the two cities together. The ticket costs 500 RMB or $73.

In 1980 when I took the train from Shanghai to Beijing it took more than 24 hours and stopped at every major city along the way. The ticket cost 100 RMB.

The train begins its journey slowly as it leaves the Yangtze River Valley and then speeds up to its cruising speed as it enters the plains of central China heading for the capital.

Train travel in China is the lifeblood of the nation. Passengers of all social economic classes use the train for business and pleasure.

Soon the trains will be sold out as the Spring Festival approaches - a time when (similar to Thanksgiving) when most Chinese make the trip to their home towns to see family and friends for the New Year (bearing gifts of course).

In my cabin there were four of us. All businessmen heading to Beijing. The generous quilts and central heating kept the cabin very warm. The most difficult part of the trip was the snoring from the top bunk !

With the new government infrastructure incentive program an even faster line is planned between Shanghai and Beijing that will shorten the trip to about 6 hours. Once the line is completed in 2010/2011 the two cities will be tie together even closer.

When I left my office yesterday I took the subway to the train station, boarded the train, arrived in Beijing and took the subway to my first meeting. The wonders of public transportation !

Despite the new "car culture" in China public transportation continues to expand rapidly. Without public transportation China's 1.4 billion people would be "stuck at home !"

As with most issues in China......it all comes back to managing 1.4 billion people !

1978-2008 - 30 years of Reform

I did not arrive in China until the spring of 1980 - two years after the economic reforms of the past 30 years started. China was a poor and extremely underdeveloped nation. It is no longer such a place.

For most of 2008 Chinese TV has had a series of special programs praising these past 30 years. As December nears its end the "summing up" has reached a crescendo of sorts with a formal meeting held in Beijing. The meeting's purpose was to state clearly that the reforms have been successful and will continue but that the mistakes of the West will not be duplicated in China.

The key question is will continued economic reform in China be enough or will dramatic political reforms be necessary to sustain China's growth into a world power ?

With nearly 30 years of experience living and working in China my hard fast judgment is that China will never become a western-style or American-style Democracy. The "magic" which is the essence of the American system is nearly impossible to duplicate in China. Chinese history is just too rooted in the present day. The society still defines itself based on its historical values - replicating the successes of the apst in order to ensure a stable future.

This is not entirely a bad thing. Under the current reform direction the daily lives of hundreds of millions of Chinese have been substantially improved. In fact have been improved beyond everyone's imagination.

So what is more important in the end ? Economic freedom with a small does of political reform or Political freedom and a dose of economic modernization ? This may too simple an analysis but in the end the man and woman on the street make this decision. What can they tolerate from the government in order to "protect" and advance their personal and family well being ?

In China today the middle class and a large portion of the poorer constituencies have cleared voted. Improve our economic situation, loosen controls and take a moderating political position and we should be fine.

The other side of the coin is....what if there is an abrupt change in political policy or a crisis that preempts the progress of the last 30 years ? This does make people nervous and is the main reason why so many wealthy Chinese continue to find ways to get a foreign passport. This trend will continue and perhaps speed up.

President Hu Jintao's recent statement is a very clear indication of how the government sees this issue:

"[The] path of socialism with Chinese characteristics, led by the party, its policies and its theories, is correct," he said.

I can certainly say that Chinese of economic means are able to eat where they want, mostly live where they want, go where they want.....the key is that with economic progress comes choice and with choice comes new ideas...this is the path China is following.

Rural Consumption Drive

In the US when a consumer stimulus package is considered consumers are provided refunds from the IRS because their income and tax returns are on file in the IRS digital database. The US population is approximately 300 million people.

In China there are 900 million people in the rural areas and 400 million in urban areas. it is impossible to issue a "refund" to spur consumer demand. The rural areas are still very poor and have yet to feel the impact of the modernization on the east coast.

China Daily has published a summary of how the Chinese government is trying to stimulate growth in the rural areas...
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The expert pointed out the domestic consumption, especially the largely untapped rural market, would be a long-term driving force of sustainable growth.

China announced on November 30 its plan to expand a pilot program to subsidize rural residents in buying household appliances. The incentive program is offered to all rural areas in the country, where 900 million people live.

Yuan Shanchun, a farmer in Xibeiyu Village, east China's Shandong Province, where the program was piloted, was the first to benefit from the program when it began in April. He received 241.15 yuan of government subsidy half month after buying a refrigerator priced at 1,878 yuan.

Within half a year, another 100 households in his village followed his suit to buy new TVs, washing machines and refrigerators.

"Most of the farmers made their first purchases of the luxuries, like me," said Yuan, who found the fridge can keep food more fresh and hygienic than his backyard storage.

Experts estimated that the incentive would effectively boost 920 billion yuan of rural consumption on home appliances in the next four years.

"There is still a large room for the government to mull more policies to boost consumption, such as raising the threshold for taxable income and increasing income for lower-income earners," said Cai Zhizhou, an economist with Peking University.

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Think about how fast consumerism could grow among China's 900 million individual rural consumers if this incentive package is implemented successfully !

There is still considerable growth opportunity in China and companies have a bright future if theya re able to find the niche to generate revenues and profits.

China, Japan and Korea

The three largest Asian economies are building a regional financial alliance in order to weather the current financial storm. The three prime ministers met this week in Tokyo to cement this partnership.

Historically this is a significant milestone as China is partnering with its former enemies - Japan and Korea. They are not waiting for a new agreement with the US but are proceeding to align themselves regionally.

The three countries will increase currency swaps in order to facilitate trade. They will establish financial partnerships which will increase their inter dependency over the next one to two years. This will have long term impacts on the global economy as the Asian block becomes more reliant on itself rather than looking to the West for answers.

At the same time China has continued to purchase US treasury bonds. it is maintaining its leading position as the largest buyer of US treasuries.

China's US treasury holdings now total more than $652 billion USD. Japan is second with $585 billion followed by the UK with $360 billion.

The combination of a growing Asian regional cooperative strategy and China and Japan's treasury holdings means that Asia continues to be the key force financing the US national debt. This will assure them a place at the global "table" as the current recession bottoms out and recovers in the coming years.

China is not just an exporter of low end products. It is also the largest financial anchor for the growing US debt burden.

China's NASDAQ - Will it finally come to life ?

For almost two years rumors in financial circles have tauted the possibility of a NASDAQ-like stock market based in Shenzhen for high growth small and medium sized enterprises.

It now seems that according to China Daily the State Council has issued an opinion that the new market should come to life as soon as possible.

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From China Daily:

Qi Bin, director of the research center of the China Securities Regulatory Commission, highlighted the importance of reform amid the financial crisis, especially "capital market reform". He said, the Growth Enterprise Board should be introduced as soon as possible to promote interconnection between high-innovative enterprises and the capital market.

The cabinet also stated it will support enterprises to conduct mergers and acquisitions through the capital market to enhance industrial upgrades and integration.

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If this new market comes to life investors in China will have a new exit path for their investments. My hope is that it can be more of a true market than the current exchanges and can grow as a true market rather than a "regulated" market.

Taiwan and Mainland DIRECT Links

Today marks the end of an era of isolation between China and Taiwan. Direct flights and other communications links start today !

Ever since the last boats left Shanghai carrying the Nationalist army to Taiwan direct links have been forbidden. Now they have been reinstated.

This will significantly increase the close relationship between the economies of China and Taiwan and should lead to an eventual more complete reconciliation.

This is great news for China and for the world economy and both China and Taiwn have significant complimentary economic characteristics !

Shanghai Continues To Rise

More than 20 million people in one city. What does this actually mean ?

Shanghai is equivalent to a small country. It has farms, factories, ports, airports, high speed trains, wealthy suburbs, poor inner city districts but most of all it embraces CHANGE. To me Shanghai is a city of constant change - each day brings a new view - a new perspective.

Export Slowdown

The global financial and economic crisis has started to impact China in many different ways.

In the southern export-driven boomtowns of Dongguan and Shenzhen thousands of factories have closed already. Tens of thousands of people who migrated from the countryside to work in these factories have lost or will loose their jobs.

What will happen to them ? Many will return early to their rural home towns ahead of the Chinese new year (January 26th). They will return home to their families. Those who leased their land before they migrated to the coastal boom towns will find severe problems because the holder of their land lease will not necessarily welcome them back. This could cause problems for both parties as the returned migrant seeks to return to their previous work and the lease holder seeks to hold on to the lease.

Regardless of what the workers end up doing the key question is will the Chinese export machine recover ? Will these factories be able to shift their focus from simple labor intensive export businesses to higher value added businesses ?

This shift will be very hard to complete in the short run because the majority of these workers do not have professional skills. They are not well educated. Shifting careers or advancing careers is extremely difficult.

Some will find ways to retrain by entering vocational training programs.

Some will return to the rural areas and try to start small businesses.

Some will migrate to the growing number of small and medium sized urban cities being built across China's inner provinces.

Chinese export industries must find innovative ways to re-direct their focus from exports to domestic consumption. This will take years but with such a large market available in China there is certainly opportunity if companies can make a rapid shift.

Personally I think that shifting to domestic consumption will be extremely difficult for the former export-driven enterprises.

The original export business model was based on the following principles:

1. Produce products at very low cost and acceptable quality
2. Sell the products for cost to overseas buyers in volume.
3. Collect the Chinese government export credit payment
4. Generate profit based on the export credit

Given that there is no industry subsidy for domestic production many enterprises will have to find ways to differentiate....this means higher quality....higher quality than the next competitor.

Higher quality means investment in fixed assets and training the workforce. This will raise costs and put pressure on margins.

To sum this up in one sentence:

Many Chinese enterprises have made a significant amount of profit in the last 10 years BUT this has been "easy money." That is a rising tide lifts all boats.....now that the tide has receded enterprises must differentiate or die.

This is the current challenge.

Tea House Contrast

Today I spent the afternoon with about 30 Moms and Dads in a local Tea House discussing the current economic crisis and how it could impact China next year and in the years to come.

Four tables were covered with snacks and a variety of different teas - each satisfying a different palate. I presented my perspectives on the world economic crisis and tried to put it into perspective for the audience of newly minted middle class Shanghai parents.

This was one of many experiences I have had in China that reinforced the reality that Chinese know substantially more about the United States than Americans know about China.

The conversation was focused on investment opportunities. Is American Real Estate a good investment now ? Should we buy property in the US now (its cheap right ?) and then pass it on to our children ?

Should we send our high school aged children to the US now or wait until they go to college ?

If Americans change their purchasing behavior and stop using credit cards will China's export engine stall even more ?

What is the safest investment in the current downturn ?

The amount of wealth generated by the new Chinese middle class is staggering. The 40%+ savings rate has created a new class of investors who are sophisticated and extremely active. They are aware of the world and engaged in the world.

They see the future as bright.

Americans need to change their thinking about China. China is not a monolith. China is a diverse country with a diverse set of people seeking a better life for themselves and their children. The American dream is alive and well in China.

我也80后的－I'm Also From the 80's Generation !

In China today there is a popular term used to describe the generation coming of age in their late twenties and thirties. The term is used to describe China's new generation which has been born and educated since 1980 when the Opening Up to the outside world began under Deng Xiaoping.

This generation is considered a "gifted" and "lucky" generation. They have been born into relative prosperity. They have chances which their parents never had. They have a bright future in front of them. They are the hope of the rising middle class in China.

I was not born in 1980 but came to China in 1980. Thus I am also part of this generation. I have witnessed and participated in the changes. I have seen the shift from poverty to relative wealth.

This blog is dedicated to capturing this perspective....the perspective of nearly 30 years of change and development in China.