china’s smoggy economic miracle

I apologize for my recent lack of posts. I’ve been travelling a lot this past month. I just got back from ten days in China, where I visited with the chief financial officers of eight companies in Beijing, Shanghai, and Hong Kong. Their businesses ranged from solar panel manufacturing to construction to internet retailing. Aside from some minor language barriers, the meetings were all more or less identical to the thousands I’ve participated in here in United States–that is, they were straightforward, rather sleep-inducing discussions of things like cash flows, production capacities, and earnings forecasts. You can talk all you want about free trade and laissez faire government policies. In my opinion, the true indicator of a country’s commitment to a market economy is how professionally boring its corporate CFO’s are. By that metric, China might be even more capitalist than we are by now.

My last trip to China was six years ago, and its economic vitality hasn’t abated at all since then. Construction cranes still fill the horizon in every city, and traffic in Beijing and Shanghai made rush hour in Manhattan look like a Sunday drive. I think every American should go over there at least once to see what true growth looks like–both the good and the bad of it. I’d like to say I worked in some time to see the sights, but that would have been impossible, not just because my schedule was so busy, but because my eyes were burning from all the smog. The only “sight” you see most days is a thick brown haze that hangs over China’s cities like something straight out of a Dickens novel.

Eighty percent of China’s supposedly modern industrial economy is powered by good old fashioned coal. It’s not just factories and other manufacturing facilities using the stuff. Every day in the late afternoon, people start burning coal cakes to heat their homes as the chilly nights come on. The effect is incredible. It looks like the fog that comes in through the Golden Gate here in the Bay Area–except it’s not pleasantly cool and misty, it’s toxic! If you want to experience what that means for the people living there, go down to the corner store, purchase a carton of Marlboros and smoke all of them at once while doing fifty jumping jacks. Feel that burn? That’s probably about what your average Chinese worker experiences on a daily basis. Now multiply that person’s inevitable health problems like emphysema and lung cancer–and the costs of treating them–by more than a billion. That’s what China’s government is going to have to contend with in the coming years. That and all the major “western” maladies, too, like diabetes, obesity, and heart disease.

There are more than 300 million people with middle class incomes in China now, more than the entire population of the United States. They like their McDonald’s and Coca-Cola just as much as we do. (They also like to gamble. I spent a few days in Macau and the palatial casinos there make the ones in Vegas look like bingo parlors.) As they get used to the comforts of their new lifestyles, they’re beginning to hate exercise as much as we do, too. Chinese consumers bought almost 20 million new cars last year, compared to less than 15 million sold here in the U.S..  If you want to know why General Motors has come back from the dead so quickly, and why its stock is currently pushing towards its 52-week high, it’s not because it’s selling a ton of new Chevy’s here in the America. In fact, just a few months ago, China officially eclipsed the U.S. as GM’s biggest market–despite the fact that China’s government has been desperately cutting import quotas to deal with its pollution and traffic problems.

Notice a trend here? All the companies I’ve mentioned from my trip to China have been American. That’s because, as well-run as the Chinese companies I visited were, the real winners in the country’s expansion have been and still are the big multinationals. Even the casinos in Macau were almost all run by U.S. corporations. Without the revenues they’ve earned in Asia, gaming titans like Wynn and Las Vegas Sands almost certainly would have gone bankrupt by now. Before I left, I wrote that the best way to profit on growth in the developing world is by investing in the S&P 500. My experiences on my trip only confirmed this belief. It’s impossible to overstate how popular American brands are in the Far East. People can’t get enough of them, and those companies are all too happy to give them what they want.

 


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  1. Pingback: why jamie dimon’s big insider purchase may not signal a bottom for financials | the confessions of a contrarian investor

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