Comment again today is by JUSTIN FORD, publisher, editor and writer of newsletters on global investment, including China. Justin reported for us from Panama City last May during our Annual Sovereign Society Offshore Opportunities Conference. After the debut in Japan of his book Seeds of Wealth last week, he traveled in China with the Sovereign Society Far East Investment Tour, that ends this weekend in Hong Kong.
Dear A-Letter Reader:
My friend Bob Bauman tells me that when the late Will Rogers returned from a visit to Russia in the 1930's, he said there were no Communists there. How did he know? Because, in America, Communists stood on soap boxes and extolled the virtues of the classless state. He saw no such thing in Russia.
Well, I've been to two Communist countries and I guess I haven't seen any communists either.
In 1984, I spent 24 hours in Yugoslavia. I stayed at an 18th century palace in Zagreb that had been converted into a hotel. The accommodations were fine. The atmosphere was grim. It was a Kafka novel. Everything was gray. The people seemed dispirited. As yet in those days, there was no light at the end of the Soviet tunnel.
But even on the edges of the Soviet Iron Curtain, I don't know if I met a single communist. I found people living under communism. But no one was slapping me on the back, calling me "comrade" and exulting in the blessings of their perfect society.
When I first visited China in 1997, Deng Xiaoping's reform policies were only just gaining momentum. Yet cities like Shenzhen and Shanghai already felt capitalistic. The streets were bustling and the people I met were talking about the opportunities they were pursuing.
Today I pick up that same energy in China, but multiplied tenfold. You feel it even in Beijing -- the capital of the People's Republic.
Hundreds of millions of Chinese are far richer today than they were in 1997. You see it in the new construction, in the expanded downtown's, in the Ferrari shops, in the new highways filled with new Hondas and VWs and BMWs, made in China, financed by Chinese banks. You see it at the historic sites -- from the Great Wall to The Forbidden City, where tens of thousands of local tourists pay $6 to $8 for admission every day.
The streets are not paved with gold. In the interior, most Chinese still live near subsistence levels. And hundreds of millions still live in poverty all over the country. But in the major cities, in many second-tier cities and along the eastern coast, production has soared and standards of living overall have risen.
The genie has been let out of the bottle. Too many people have experienced how much they can change their lives when they are freer to make their own choices.
My guess is that 10 to 15 year from now, a much greater number of Chinese will have joined in the growing prosperity of the country. They'll have higher real incomes, better health care, higher levels of education, and more disposable income.
You can refute the idea of communism all you want. But a trend like this can make it obsolete.
That's my hunch when I look at China from the outside -- through statistics and news reports. And it's the gut feeling I get now that I'm in the country and have witnessed its rapid pace of change.
But what do I know? I'm just a "big nose" passing through. ("Big nose," I'm told, is an affectionate slang word for occidentals.) I'm no China expert. Yet I'm glad to say that at least one China expert holds similar views. And he's not just optimistic on the economy. He thinks the opening of market forces will ultimately help strengthen civil and political rights as well...
An Unrepentant Optimist in Hong Kong
The keynote speaker at our conference in Hong Kong today was the Honorable Martin Lee. Mr. Lee is known as the father of Democracy in Hong Kong. He is still waiting for the birth of that baby. Yet, for reasons you'll see, he is optimistic.
Mr. Lee is the founding Chairman of the Democratic Party, Hong Kong's most popular political party. He was first elected to the provisional Legislative Council in 1985 and served in that body and on the Basic Law Drafting Committee until 1991, when he was elected to the UK's colonial Legislative Council. He was later ousted by Beijing in the wake of the Tiananmen crackdown on all dissidents.
In the first elections following the 1997 hand over to China by the UK, Mr. Lee was elected to the Legislative Council and has been overwhelmingly re-elected in the two elections since then. Mr. Lee is the recipient of human rights awards and honors from governments and institutions around the world and remains at the forefront of the democracy movement in Hong Kong.
The history of Hong Kong since the hand over is quite involved. But here's a snapshot of what's happened and what Mr. Lee expects in the future for Hong Kong and China. Hong Kong did not have democracy during British rule (1841-1997). However, Hong Kong did enjoy the Rule of Law under the British. And the Hong Kong people liked it.
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The British only began to allow true democratic reform as they were preparing to hand Hong Kong back to the Chinese. Part of that process was the drafting of the Basic Law that would be in effect after the transfer of sovereignty. The key idea the British worked out with Beijing was that Hong Kong would have "one country, two systems."
Hong Kong would remain autonomous in many respects, with its own legal system, currency, customs, taxation and immigration laws. Only national defense and diplomatic relations would be the responsibilities of the People's Republic of China.
To a large extent, this is how it has worked out. But there have been some major bumps in the road.
In 2003, Hong Kong people took to the streets. They were protesting a series of unpopular moves by Tung Chee Hwa, Hong Kong's Chief Executive. Their chief gripe was a proposed anti-subversion law. Anti-treason laws are common the world over and Hong Kong people would have accepted one. However, this version would have circumscribed basic liberties such as freedom of association and freedom of the press.
That was the bad news. The good news was that Beijing didn't react as they did to the Tiananmen Square protests in 1989. Instead, they ended up tabling the proposed law, dismissing Mr. Tung and replacing him with Donald Tsang.
Like Mr. Tong, Mr. Tsang would ultimately follow Beijing's wishes. Yet, he was by no means a predictable choice. Mr. Tsang had been a civil servant during British rule. To this day, he still wears a bow tie. And he even had the audacity to accept a British knighthood just three days before the 1997 Hong Kong hand over. This pedigree made Mr. Tsang a very unpopular figure among Communist cadres. And yet, here he is, appointed as Chief Executive of Hong Kong by Beijing.
What's more, Mr. Tsang has made decisions that, according to Mr. Lee, support the continued rule of law in Hong Kong. Mr. Lee, for instance, is an admirer and close friend of the attorney general appointed by Mr. Tsang. If Mr. Lee were Chief Executive, he would have appointed the same man himself.
But a major change did take place in 2003. Key executive decisions for Hong Kong now come from Beijing. Yet you may be surprised to learn that most Hong Kong people think this is actually an improvement. And Mr. Lee agrees with that assessment.
Hong Kong remains a vibrant economy, operating largely independently on economic matters. It has more civil protections than any other city in China and more than most cities in all of Asia. So there has been progress. But there is still no democracy.
In fact, the Chief Executive was supposed to be open to popular elections in 2007. In 2008, the entire Legislative Council was to be subject to elections (instead of half elected and half appointed, as is now the case). But now, a series of cloudy statements from Beijing hint that may not happen on schedule.
So what is China afraid of?
The answer, says Mr. Lee, is that democracy for 7 million Hong Kong people could lead to democracy for 1.3 billion mainland Chinese. And that, over the long term, is precisely what Mr. Lee expects to happen.
The genie has been let out of the bottle. There is no putting him back.
Mr. Lee thinks the economic development of China goes hand in hand with the gradual development of civil and political rights. In fact, in 2000, President Clinton invited Mr. Lee to address members of the US Congress who were considering opposing China's accession to the WTO on human rights grounds.
Mr. Lee -- a man who puts his neck on the line for civil and political rights -- made the case that isolating China would be counterproductive to the advancement of human rights in this country. He'll be making the same case to Condie Rice next month, a friend of Mr. Lee and a supporter of his democracy movement.
When an American, Japanese, European or Australian company sets up shop in China, they invariably end up paying more and offering more benefits to Chinese workers than Chinese companies typically do. In fact, Beijing insists on it. And as foreign investment continues to pour in and as living standards rise, so do the Chinese people's expectations.
That is one of the reasons Mr. Lee likes to quote the Catholic Bishop of Hong Kong. Mr. Lee knows there are many challenges ahead. He is in the thick of the fight. But, like the bishop, he is "an unrepentant optimist" on Hong Kong and -- in the long run -- on mainland China too.
Taking Stock in China
OK, if you decide to invest in China now or at some point in the future -- directly or indirectly -- you may play an indirect part in lifting living standards and maybe even furthering the cause of human rights. But you probably want to make a profit while you're at it. So let's take a quick look at the stock market...
Among our other speakers at the Hong Kong portion of The Sovereign Society's Far East Financial Expedition today, was Samson Rattiwat. Mr. Rattiwat is the Assistant Director of Taifook Asset Management in Hong Kong.
Mr. Rattiwat pointed out that China has been the fastest growing economy in the world for over a decade. GDP has expanded at about 9% a year since the early '90s. Yet the Shanghai stock market is down about 50% from its high of four years ago and about 80% from its high of 1993.
There are plenty of reasons for this.
First, China is in transition -- from total central control to a "mixed economy" where market forces coexist with government development plans. And as we heard the other day, China is still in the process of developing a modern legal system and independent judiciary.
At the same time, foreign investment has flooded the country, currently totaling $70 billion a year. This has helped create what Jack Flader of the Zetland Financial Group told us today was an "industrial revolution on steroids." Yet it has also created some speculative bubbles.
On Wednesday we looked at the rush of US investors into China IPOs at absurd valuations. There is also significant speculation in real estate. This is especially true in Shanghai and its environs. Many properties have doubled there over the last three to four years. Leon, our local guide in Hangzhou, has actually seen his riverside condominium in Hangzhou (three hours from Shanghai) rise by 150% in value.
There are also the big macro questions. Among them...What will happen to the tens of millions of underemployed workers in China's State Owned Enterprises (SOEs) as the country continues to reform? Will China's plans to allow foreign banks to operate in China overheat the economy?
Last but not least, there is the issue of Chinese accounting standards. Most mainland Chinese companies do not meet GAAP (Generally Accepted Accounting Principles). But most Hong Kong big caps meet GAAP or similar standards. And all China ADRs on the NYSE have to meet GAAP to list on the NYSE. And that brings us to our opportunities...
Fight the Flu and Profit Too
Right now the Bird Flu is casting a pall over the Chinese markets. We can't predict how it will pan out. But there is precedent for how the markets may behave while it remains front-page news...and how it may rally when the threat appears to have passed.
That precedent is the SARS epidemic of 2003. When SARS broke out in the spring of 2003, the Shanghai market fell over 20% in six months. But that was followed by a rally of over 30% in the following six months. The Hong Kong market, however, fell far less during the epidemic and rallied much farther when it passed.
The Hang Seng fell just under 10% early on in the epidemic. But within a month, it began a rally that would take it up over 60% by the following spring. Among the strongest performers during that period were utilities.
These are traditionally defensive stocks in markets around the world. They held up and continued to advance in China during this difficult time, as well. One of the major utilities that Samson likes is China Light & Power, listed on the Hang Seng, but also available through most US brokers that deal with foreign shares.
Another strong defensive play is the mobile phone industry. During the SARS epidemic, in fact, the volume of cell phone calls understandably rose, as people were checking up on each other a lot more often.
Three Chinese mobile phone companies are listed in the US. China Mobile, listed in the US, rose over 95% in the eight months following its April 2003 lows. China Unicom, also listed in the US, did even better -- skyrocketing over 160% in ten months.
Another strategy is to play travel and hotel stocks once the Bird Flu begins to wane. China Eastern Airlines, for instance, shot up 144% in ten months following its lows in April of 03.
You can get all of the current investment recommendations Samson gave at the Hong Kong portion of our Seminar today by ordering The Sovereign Society's Far East Expedition Audio Series. The full price will be $129 for A-Letter readers and $109 for Sovereign Society members once the audio tapes are ready for download next Tuesday, November 22nd. But if you place a pre-release order now, you'll save $30. Pay just $99 as an A-Letter reader or just $79 if you're already a Sovereign Society member.
That includes audio recordings and files of presentation handouts from our investment and asset protection experts at our Far East Financial Expedition. Direct and indirect China investment plays from Samson Rattiwat of Taifook Investments, Chris Mayer of Capital & Crisis, precious metals and foreign exchange expert Michael Checkan, Asia investment specialist Dino Zavagno of Hong Kong's Gladstone Morgan, Jack Flader of the Zetland Financial Group in Hong Kong, Andrew Wong of GC Capital Limited... plus the latest asset protection and global investment ideas from Swiss asset manager Robert Vrjihoff, Thomas Fischer of the A-1 rated Jyske Bank in Copenhagen, rated the safest place in the world to open a bank account... Peter Zipper of Vienna's Anglo Irish Bank on how to gain constitutionally guaranteed privacy for your investments... Marc Sola of Zurich on the unique combination of flexibility and rock-solid security with a properly structured Swiss annuity...and much more.
Order The Sovereign Society's Far East Financial Expedition Audio Series today (Click Here) and you'll save over 20%, you'll get an inside glimpse into the best investment opportunities in this rapidly developing area of the world, and you'll pick up many other profitable ideas for protecting and growing your wealth in asset havens and markets around the world.
From Hong Kong,
Justin Ford
PS: I wanted to tell you a little bit more about the Perth Mint Certificate Program (PMCP) I mentioned yesterday. In between seminars today, I sat down with Richard Hayes, CFO of the Perth Mint in Western Australia. The Perth Mint refines over 99% of all the gold mined in Australia, New Zealand, Fiji, and Papua New Guinea, as well as a substantial amount of gold coming out of Korea, Malaysia, Thailand and Vietnam. It also presses blank coins for the US Mint (using US mined gold), which the US Mint then stamps. he Perth Mint is owned and run by the Western Australian government and its program is the only triple-A-rated, government guaranteed precious metals certificate program in the word. So, if you're interested in diversifying into gold, silver or platinum -- with all the benefits I mentioned yesterday of liquidity, low commissions, ease of purchase, low minimums ($10,000), no storage fees, and the ability to accept physical delivery of the metal if you like- you would be very hard pressed to find a better program offered by a more dependable institution. You can learn all about this program in Michael Checkan's presentation in the Audio Series. Click here to order now:
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