A Bull in China

A Bull in China

Introduction: Catching the China Ride
 
Why invest in China?
 
After reading this book, I hope you’ll agree that it still offers tremendous opportunities to the diligent investor in the century to come.
 
That’s just what I said to myself way back in 1984, when I sought to become the first Westerner—maybe the first person ever—to ride a motorcycle across China. At the time, I’d earned enough as a cofounder of Quantum, a global investment fund, to sit in a Manhattan town house and count my dividends. But I’ve always been one of those adventuresome capitalists who would rather see, smell, and taste the real action than sit in a boardroom scanning graphs and charts.
 
Swapping my three-piece suit for a helmet and leathers, my ultimate aim was to make it around the world on my bike—while seeing as many changing societies and economies as I could put on my odometer. Getting to the Great Wall on my own set of wheels, and getting a read on one great big chunk of humanity, seemed the perfect escape from the pressures of Wall Street.
 
In the end, it took me more time and pit stops to get the many permits required by the Chinese than it took me to cross over three thousand miles from coastal Shanghai to the Karakoram Highway into bordering Pakistan. I suspect that I probably obtained all those official papers because nobody had ever dared ask to do something that weird.
 
My long ride was hardly a stroll through a teahouse. Roads turned to sand, or got washed out by floods. The detour signs weren’t the sort I knew how to follow. Rocks bent my wheels, but spare parts were scarce and, at that time, so were decent Chinese restaurants—though the banquets were tasty when I found them. After too much riding gave me a stiff neck, a small-town doctor made me one of the first Western guinea pigs in China to get stuck with acupuncture needles. I was stopped by traffic cops more times than the Road Runner, had to weave safely past a nation of first-generation drivers, and once ran out of gas right in front of a top secret military base. Asking for a spare liter from the People’s Liberation Army was tough, but they eventually did their bit to help me get down the road. However, I turned speechless at a fledgling disco in a small-town park when a polite young Chinese man asked me to be his partner for a fox-trot. Back then, few people were trotting out their business English, and the locals weren’t sure what to make of a sandy-haired “foreign devil” from Alabama with no banjo on my knee but plenty of Gobi Desert dust on my face.
 
But I had such a blast that I crossed China again twice more, in 1990 by motorcycle, and nine years later in a customized Mercedes car as part of an epic three-year trip that covered 152,000 miles to celebrate the millennium. Each time I returned to Chinese soil, I felt like I was coming to an entirely new country. I eventually saw how all my assumptions about the fast-changing People’s Republic had been plain wrong. I figured that the Chinese and I were complete opposites: the brash individualist tasting the freedom of the open road and championing unrestrained markets, versus group-minded, state-controlled, godless Communists.
 
That last one got put to rest on one of the very first nights of one journey. Checking into a hotel in the Muslim Far West, I saw a banner strung across the lobby that read, HOUSE OF GOD. Besides, I knew that if the people who ran China were giving an unrepentant Yankee trader like me the chance to run loose, something fundamental had to be changing.
 
I wish I could say that I was out there scouting for start-ups or great penny stocks. But I did tell anyone who would listen that these folks just might be presiding over one thriving economy within twenty years. In 1978, China’s supreme leader, Deng Xiaoping, had restarted traditions of commerce suppressed for decades by wars, civil strife, and Communist dogma. So my cruises afforded me a terrific ground-level view of the “capitalist road” China was starting down. China’s stock markets weren’t open for business as yet, but real markets—the kinds where people buy a fish or a yard of silk—showed me how peasants were already tasting the fruits of deregulation and free enterprise. The way the price of watermelons kept fluctuating before reaching the proper level of supply and demand, and the way sellers haggled over them, made me wish I could have bought myself some melon futures.
 
Suddenly, the Chinese were forging their own careers and charting how to pursue a better life for their children. The amazing potential and entrepreneurial spirit of a billion people had been unleashed. I never got over the excitement of hearing a new restaurant owner speak proudly of meeting his payrolls, or returning to find a farmer’s savings invested in his own carpet factory, watching kids who earned money from pool tables on the side of the open road moving on to bigger enterprises, or seeing one acquisitive peasant become “the orchard king” after buying up every plot of apples in his region. And making it all more exciting was the way people everywhere were reconnecting with traditions that for centuries had helped China lead the world’s trade, science, and innovation.
 
I can’t claim all my forays made me a true “China hand.” Maybe just a China foot. Nor was I ever one of those goo-goo-eyed believers made giddy by the prospect of a billion-plus paying customers. As recently as 2004, when Chinese stock prices were still in the doldrums, weighed down by state-held shares and excess regulation, I spoke so pessimistically about investing that a national TV program out of Beijing censored my remarks.
 
Still, a conviction I acquired by the seat of my pants—and confirmed over time with hard, cold numbers—has led me to invite you to hop aboard an even more profitable journey. There will surely be rough patches on that journey, but I am convinced that those who ride them out will see real long-term gains. Actually, those rough patches will provide the most buying opportunities for investors—so the rougher, the better.
 
You could say that this book has been twenty-three years and over fifteen thousand miles in the making. So I hope you will use it as your road map to investment earnings in China. As one Chinese proverb says, “If you wish to know the way ahead, ask those who have traveled it.”
 
When I first glimpsed the skylines of Chinese cities, they were drab and empty, dotted with a few Soviet-style spires. By 1990, they were clogged with construction cranes (Shanghai alone had a majority of those in use around the globe). These days, you don’t see so many because the foundations of a modern powerhouse have already been laid. Now the world gets the fun of seeing what’s going to rise upon them. And finally, after years of stutter steps, the same thing is happening with China’s stock markets.
 
For nearly three decades, China has been the fastest-growing country in the world. With a rate of savings and investment exceeding 35 percent among its 1.3 billion people, and foreign reserves that already top the planet, it is set to become the most important country in mankind’s future.
 
I’ll go a step further: just as the nineteenth century belonged to England and the twentieth century to America, so the twenty-first century will be China’s turn to set the agenda and rule the roost. Before I get into a single stock listing, the very best advice of any kind that I can give you is to teach your children or your grandchildren Chinese. It is going to be the most important language of their lifetimes.
 
Looking at China today, I see a whole lot of room for upward growth in Chinese industry, including power and energy, tourism and media, agriculture, infrastructure, high-tech—and I’ll highlight those that could turn out to be the most “recession-proof.” For those willing to put aside old prejudices and put in the time, the future AT&T’s, Microsofts, and General Motors are waiting to be discovered. No wonder I’m a bull when it comes to this China shop.
 
In what follows, I’ll explain in detail the mechanics of purchasing shares in China’s ever-increasing legion of listed companies. I’ll run through the handiest means to pick up the best bargains in Shanghai, Shenzhen, Hong Kong, or even New York, right from your corner broker. On the surface, China’s numerous exchanges and multilayered regulations can appear daunting. So I’ll try to make clear China’s initially confusing A-shares and B-shares, and I’ll recite the ABC’s of secondary tools such as ADR’s (American Depositary Receipts, a common way for foreign companies to access U.S. markets that makes it easier for Americans to invest in China). I’ll dot the i’s when assessing the country’s quickening procession of seemingly irresistible IPO’s (initial public offerings). Above all, I want to reduce the intimidation factor, and make sure that, when it comes to your money, nothing gets lost in translation.
 
Along the way, I’ll offer my analysis of China’s economy and outline the dynamics that drive earnings and innovation. I’m going to run down the significant government policies that affect domestic industries and global markets—as laid out in the latest Five-Year Plan, which is put out by China’s rulers and is the basic blueprint for the country. And I intend to show both individual and institutional investors the way to benefit from emerging trends only China-watchers can glimpse. Where it matters, I’ll analyze the World Trade Organization (WTO) framework that China entered into in 2001. In many cases, the changes in regulation, the reduction of tariffs, and the promises of greater market access for foreign firms are just beginning to shape competition in fields like banking, media, and telecommunications. In 2001, some hard-liners warned that lowering many trade barriers would harm the domestic economy—but it seems liberalized rules for imports and exports have only opened up more business for both sides and have spurred innovation within China’s more stodgy industries.