Investing in China in 2006: Red Capitalist Report #1 -- You Won't Believe What I Saw In Shanghai!
by Mark Skousen, Chairman, Investment U "Poverty is a good thing. It gives rise to a desire for revolution." - Mao Tse-tung (1958)
"To get rich is glorious." - Deng Xiaoping (1978)
I just returned from a two-week fact-finding mission to China, and you won't believe what I saw.
Beijing is no longer just a political landmark. I saw hundreds of high rises under construction outside the Forbidden City. Cranes as far as the eye can see… A local expert told me that it has little to do with the 2008 Olympics. Millions of rural Chinese are moving to the big cities to take advantage of the Red Capital (as in capitalism).
In Chongqing, a city of 6 million in the interior of China, I witnessed half the city being rebuilt with skyscrapers and tall cranes.
But nothing prepared me for what I saw in Shanghai, the country's financial center. In this issue, we'll answer the question many are asking these days…"should I be investing in China in 2006?" China Is Completely Transformed… And 75 Million More Are On the Way In My wife and I were in Shanghai in 1989, when the city was under one big bulldozer and most of the people traveled by bicycle. Now, 17 years later, I see the results - they are staggering: Hundreds and hundreds of high rises, either built or under construction. More cranes. (It is estimated that 80% of the world's cranes are now in China!) And everyone drives cars. (Shanghai is one huge traffic jam.)
I met an old friend there, Jim Green, and his wife, Renee. Jim informed me, "Shanghai has 4,000 skyscrapers now, twice the number in Manhattan, and plans to build an additional 2,000 in the next five years. And this is just one city in China. There are over 170 cities with populations over a million. They are building, throughout the country, the equivalent to a city the size of Houston every month, or of San Francisco every two weeks!"
But Jim and others in Shanghai also pointed out that this unprecedented building boom is fraught with risk. There are millions of square feet of new, un-rented living and office space available (many empty buildings). Cities are trying to stay ahead of demand, with an estimated 75 million people expected to move from rural areas to the cities of China in the next five years (if it happens, it will be the largest mass migration of people anywhere in the history of the world). But this space will probably be filled, if all goes according to "central plan." Despite adopting capitalism, the Chinese Communists are still afraid of letting the market make the decisions. Which means they will probably blunder sometime down the road. But for now, everything is looking up.
Businessmen And Party Officials Are Profiting
China has many things going for it right now, including: - A 9% growth rate (13% in Shanghai)
- A literate, hard-working population of 1.2 billion (who are also future consumers)
- Cheap labor earning an average of $160 a week
- A strong and stable currency
- Gigantic trade surpluses from abroad due to huge profits from export-oriented businesses
- And foreign exchange reserves approaching $1 trillion.
The government is encouraging this fast pace. The Chinese are determined to elevate their status in the world view. We heard Dr. Anyue Zehan, counselor to the Beijing City Government, speak eloquently about the rapid rise of China as an economic powerhouse, and he repeatedly praised the USA as "our partner" in success. New president Hu Jin Tao speaks constantly about the importance of "innovation" in the Chinese economy. The mandate is clear.
The new capitalists aren't the only ones seeking the glorious path of wealth in China. Top Party leaders own huge stakes in government-controlled companies, and stand to reap immediate windfall profits when these companies go public. So they are beginning to do more of these deals.
The China Communication Construction Group IPO later this year will be one of those, and is expected to be extremely profitable. Why The Time Is Now To Be Investing in China… Here's How To Profit Nothing anytime soon is going to stop the Chinese "bulldozer" from continuing its relentless press toward ultimate world market domination. Might as well join the bandwagon and let your investment portfolio benefit from this unprecedented success. We heard several experts identify highly profitable investing opportunities via the Chinese Connection. Oxford Club Investment Director Alex Green and I, co-hosts of the investment tour to China, both recommend the Asian closed-end fund managed by legendary Mark Mobius: The Templeton Dragon Fund (NYSE: TDF).
I've interviewed Mark Mobius several times, and he worked 24/7 looking for the cheapest ways to profit from the Asian boom. His brilliant research has paid off for investors: TDF is up 45% in the past year, and 130% in the past three years. And it's still selling at a discount to net asset value. How To Invest in China: Red Capitalist - an Afternoon Stroll Through China's Next "Chapter"
It happened in Beijing, only a block from our Grand Hyatt Hotel where we started our China investment tour. While the rest of our group was resting up or drinking a red wine after taking a long march to the Great Wall of China, I slipped out to walk the streets of the Forbidden City.
Being an author and avid bookstore lover, I couldn't resist walking into a large, four-story all-Chinese bookstore, even though I knew I would not be able to read the titles.
I couldn't believe what I saw. The bookstore was jammed with Western textbooks, all freshly translated into Chinese! And there were hundreds of Chinese students buying them, all for $3 to $5 each (in the States, these titles would cost $100 or more). There were literally thousands of American and European textbooks on economics, finance, engineering… you name it. I could tell because the English title and author were listed on each title page.
In fact, three of my own books have recently been translated into simplified Chinese: The Power of Economic Thinking, The Making of Modern Economics, and Economic Logic. Interestingly, chapter six of The Making of Modern Economics is a hard-hitting chapter on Karl Marx titled "Marx Madness Plunges Economics Into A New Dark Age." The Chinese translation: "Marx and Classical Economics"!
But no matter. The message is clear… China is determined to catch up with the West… and fast. In this issue, we'll address how to invest in China during these Asian boom times. China Is Making Serious Inroads… Economically Speaking The Chinese government is heavily subsidizing this publishing effort. Every textbook publisher in the country gets a budget from the Chinese government, and they are anxious to publish everything they can get their hands on. Two publishers approached me on the tour hoping to publish my latest book, Vienna and Chicago, Friends or Foes? (I decided on Century Publishing, Shanghai's largest academic publisher. The agent told me, "You are very famous here in China, Dr. Skousen"!) The China boom is evident everywhere in the English bookstores I visited in China and Hong Kong. Here are some titles: - The China Miracle
- China's Long March to a Market Economy
- China Inc. - The Next Superpower
- Red Capitalist
- Fast Boat to China
- Launching Your Business in Shanghai
There was one contrarian title, The Coming China Collapse. It was written in 2002, and hasn't sold well. I don't think an economic collapse is going to happen anytime soon, though major corrections are bound to happen along the way. How To Invest in China China has its problems, but right now, it is experiencing an unprecedented business and building boom. I urge you to get aboard for the ride and invest in China. It will be bumpy, but profitable. Here's how… There are more than 50 China-linked American Depository Receipts (ADRs) trading on the New York Stock Exchange and the Nasdaq, including such giants as: - PetroChina (NYSE: PTR)
- China Telecom (NYSE: CHA)
- China Life (NYSE: LFC)
- and China Mobile (NYSE: CHL)
To invest in them all, consider the iShares FTSE/Xinhua China 25 Index Fund (NYSE: FXI). 
As the chart above shows, it's a hot investing market.
Investing in Chinese Stocks: Red Capitalist - The Here and Now for Investors, plus Four Long-Term "Red" Flags For China
My fact-finding trip to China confirms that 1.3 billion Chinese are focused on one big goal: keep the economy booming so that by the time the Olympics in Beijing rolls around in 2008, China will be able to stage the biggest international event in its history. It will be a gigantic coming-out party symbolizing China's industrial might and entrance to the "first world" of nations. It will mark a symbolic victory compared to the last time I was in China, in 1989, during the bloody suppression of the Tiananmen Square protests. Every Chinese official and tour guide echoed the same sentiments: Forget about politics and try to change things - only economics and financial advancement mean anything. Even Austrian economist Dean Peng, a libertarian, told us in Beijing that he expected "no crisis" in the transformation toward democracy in China. The theme is universal: "To get rich is glorious." And China's doing just that, largely through an export-driven market, as the following graph indicates: 
I have every reason to believe China will achieve this short-term goal, and that's why I'm recommending investing in Chinese stocks, as well as Asian stocks in general, right now. Will Chinese Stocks and its Economy Suffer Post-Olympics? The investment opportunities in Chinese stocks are here and now. However, China faces four major challenges once the Olympic games are over which ultimately will have an effect on investors still looking to profit off the China boom: 1. Rising income inequality between rural and urban incomes:
City Chinese are earning twice as much as rural Chinese. As a result, millions of rural farmers are moving into the city, a massive immigration that could cause social strife. The government is trying to keep up with massive construction of high-rise apartments, but it may not be enough. 2. A potential financial crisis: - 70% of private banks are in trouble in China with massive bad loans (similar to Japan in the 1990s).
- The Chinese capital markets are struggling following the stock market collapse in 2001-04.
- Currency speculation could surface.
- And if much of the investment turns out to be malinvestment (many observers think China is overbuilding and overinvesting, especially in public infrastructure projects), China could be in for a financial disaster despite its huge foreign reserves, strong revenues and low deficit.
3. Lack of accountable government at all levels, including the Chinese judiciary:
When I asked Chinese graduate students if China enjoys the "rule of law," most of them shook their head. After decades of communist rule under Mao, there is a sense that no independent judiciary or basic property rights exist today. If a government official wants to build a high rise over a piece of farmland, he does it - no questions asked. 4. Unstable geopolitics:
Growing Chinese nationalism could destabilize if an incident arises with archenemies Japan and Taiwan. Fortunately, the rapid rise in trade and investment between China and these two islands will discourage an all-out war. Yet Beijing's massive buildup of armaments and military (at double-digit annualized rates) is cause for concern. In Beijing, we saw soldiers everywhere. Conclusion In sum, I'm positive about China overall… and investing in Chinese stocks… for the next two years. But after that, all bets are off. I wouldn't be selling any of my gold. | 
