In BSW Blog, BSW Philosophy, Economic Outlook, Emerging Markets

Thanksgiving is just a few short days away.  It is, without question, my favorite holiday of the year, primarily because Thanksgiving has best managed to resist the drab commercialism inflicted on other holidays.  Deconstructing the word, it is quite simply a day to give thanks — for family, friends, and our good fortune.  It is also an annual reminder that if we want a life full of success and abundance, we cannot afford NOT to give back.

This ethic was impressed upon me by innumerable people connected University of Colorado’s Leeds School of Business and I will forever be grateful for their magnanimity and generosity.  In that vein, since graduating from the University of Colorado’s law and MBA programs in 2001, I have funded a scholarship award  for outstanding undergraduates at Leeds, targeting students who are the first in their families to attend college, are in need of financial assistance, and who both excel academically and contribute to the Leeds community.  Although the award is ostensibly for the student’s benefit, it has been an incalculable joy to meet, interact with, and, yes, learn from these outstanding young students.

This all came to mind when I recently received an email (more on this below) from my 2009 award recipient, Fan Hong.  Fan and his parents moved to the US from China when he was in grade school.  Neither he, nor his parents, spoke English.  Although he initially struggled to overcome the language barrier, Fan went on to excel academically, scored a perfect 800 on his math SAT, and become the first person in his family to graduate from (or attend) college.  At Leeds, he became president of the Finance Club and was a star graduate.  During an internship with IBM Global Finance, his quantitative abilities and fluency in Mandarin made him a critical asset on a project in China — leaving such an impression that IBM recruited Fan to their home offices in Armonk, NY, where Fan now works.

At BSW, we go to great lengths to cultivate unconventional sources for insights into the economy and investment markets.  Our clients are often excellent resources in this regard, with broad networks of connections in a wide array of industries.  We also regularly tap our investment managers and other professional colleagues for their views and observations of trends and developments within their industries or during their travels.  We find that first-hand experience matters a great deal more than third-party hearsay that eventually filters down to conventional media outlets.   Consequently, I was thrilled to receive a first-person, on-the-ground, 22-year-old, Chinese-American’s assessment of the current economic environment in China.  Fan traveled to China with a group of Leeds students, staff, and faculty members, during which they visited Beijing, Xian, and Shanghai.  His assessment is so well written and fascinating that (with Fan’s permission) I’ve posted it below.  These insights help us better distill BSW’s investment outlook —  and also serves as another reminder that what you give comes back many, many times over.

Happy Thanksgiving.

-David Wolf, Chief Investment Officer

From: Fan Hong
Sent: Sunday, October 24, 2010 9:43 PM
To: David Wolf
Subject: China Trip

Hey David,

Hope things are going well and you’re enjoying Boulder! I definitely miss it a lot…

It was very exciting to go back to China first time in 6 years. Almost everything has changed! Not exaggerating. Beijing, for example, is a lot greener and a lot more developed than I expected, about 30% of the city is cover is green, and the government is demanding more. There’re a lot of skyscrapers co-existing with ancient buildings that were built over 500 years ago. It’s easy to see the govt has put in a lot of effort to clean and build up the city, but still does not compare to the U.S. currently (the gap is getting smaller). Another surprise thing is that there aren’t many motorcycles and bicycles on the street anymore, which was the MAIN transportation 10 years ago. Instead, the locals use public transportation (bus and subway) and cars more often now for couple reasons:

First, cars are very cheap to buy these days, in addition, banks are willing to give out loans to individuals to buy cars, no wonder China is one of the biggest car markets in the world, car dealers and manufacturers (both domestic or foreign, yes GM was one of them) made a lot of money for past decade.

Second, a lot of public transportations have built up in the past decade. One of China’s main GDP drivers last year was building new public infrastructure. All public transportations are very new compare to those one in the State. If you think CU’s new buff bus is nice, come to China. But most public transportation is packed like Buff Bus on weekday mornings and weekend nights:) – should not be a surprise considering how many ppl are there in China….And the trains we took crossing cities. Not only it’s new, but it’s faster than every single train in the U.S. and it wasn’t even the fastest ones in China. Back to my point, ppl are taking advantage of public transportation these days.

Third, the real estate price has gone unbelievably high in past two years, in most coastal cities like Beijing, Shanghai, and even my hometown Fuzhou. Housing prices in big cities can certainly compare to New York. It’s quite ridiculous. People pay 40,000RMB for a square meter ($2000/sq foot) on average for an apartment in Beijing. As a result, most people who cannot afford to live in the center part of city were forced to move “out”, bike and bicycles all the sudden don’t make sense anymore.  What is more ridiculous is that the price jacked up like 200-300% in two years. I believe mostly have to do with the private investors in China (mostly got rich in past few years) invested heavily in the housing. Thanks to the housing loans released by Chinese banks. For example, with 10% down payment, a lot of those investors can buy 10 house to speculate as compare to one without loans. When speculating, a lot of them are buying more than 10, which eventually jacked up the price…. The state and state owned banks are well aware of this situation, but they can’t tell everyone of them to stop buying because there’re so many of them! So recently, they came out with a new policy to curb the housing price increase. The policy is stating that people can only get one 10% loan on the first house they buy, for the second house, they need to put down 50% or more dwn pmt. No third house loan. This caused some panic in the housing market. As a result of the policy, multiple city housing markets had zero transaction this year. Many people were saying that the housing price will go down soon in the future. However, no one knows what the state is planning to do in the future whether to control the housing price or let the market determine what happens.

Above are some of my thoughts, hopefully it’s not too hard to read. China is quite amazing these days, even though it is overly invested right now, there’re still room for growth because at the end of the day, it is still a developing country. Education, healthcare, technology, and a few other industries are still well-behind the developed western countries. If you would like to know more about other things going on in China, would certainly be happy to chat.

Please keep in touch.

Best regards,

Fan

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