Shanghai Trip Report….

It only took a few days after I returned this weekend from China for my eyes to stop burning, and maybe the slight cough was really due to the changing seasons in Boston and not the air pollution in Shanghai (now I better understand the amenity in my hotel room – below). A small price to pay to witness the extraordinary commercial activity in what may well be the largest economy in the world sometime in the next decade. And what a fascinating time to be there – although maybe each time I go back I am at risk of thinking that that will be the most fascinating time to be there.

Gas Masks

Arguably the recently introduced reforms by Premier Li Keqiang have ushered in dramatic economic and political advancement. China has never appeared so confident, so assertive. Since late 2012 the systematic purging of corrupt corporate and government officials, undertaken to bolster the public’s confidence in the Communist Party, has led to some spectacular falls from grace. One hopes that increased economic freedoms might gradually lead to greater political freedoms (although as seen in Hong Kong these past few weeks, that does not yet appear to be the case – the October 10 China Daily editorial was titled “HK Protesters Have No Valid Grievances”). Ironically the intense focus on rooting out corruption may also be contributing to slowing economic growth as Premier Li is dependent on those same government bureaucrats to implement his economic agenda, – and many are undoubtedly quite distracted (worried) now.

Having grown up in Hong Kong I have been fascinated for many years with the dramatic ascendancy of China; in my lifetime nearly 25% of the world’s population will have “come of age” – perhaps capped off with the IPO of Alibaba last month, now one of the largest internet companies in the world. But this economic engine requires significant growth and worrying signs are now quite evident. While the official GDP growth rate target for 2014 is 7.5% (analysts worry that growth below 7.0% will cause reforms to stall out), the Chinese Academy of Social Sciences announced last week that it forecasts growth to be 7.3% this year. Storm clouds are building. Other data points – some of which were reported in the China Daily newspaper last week.

  • Two of the four largest commercial banks in China cut rates to spur mortgage lending. It is quite clear that China has a real estate “issue” – year-to-date through August 2014 home sales dropped 11%. And real estate is estimated to be ~25% of the Chinese economy.
  • Related news: the Central Bank of China cut reserve rates for the second time in the last 30 days to 3.4% to spur borrowing.
  • China experienced the greatest monthly steel export boom last month (up 73% year-over-year) due to soft local demand and perhaps indicating that Chinese steel is being dumped onto the global market – watch for a US protectionist backlash.
  • Car sales in China rose at the slowest monthly pace in September over the past 19 months, increasing 2.5%, down from ~20% last year.

While I was there Barclays Research issued an analysis of state-owned companies which underscored the depth of the economic exposure the Communist Party is confronting. More than 25% of state-owned companies lost money in 2013 (as compared to 10% of private companies); the return on equity was calculated to be less than 5% for state-owned enterprises (vs 14% for private). Just to complete the thought, return on assets – also 5% for state-owned as opposed to 9% for private companies. Clearly there is a significant amount of “unproductive” capital still tied up in the Chinese economy which has led to a dramatic decline in listed equities for state-owned companies in the last 30 days (often times declines of greater than 20%).

So what I find so fascinating is watching the Chinese government manage this colossus to a more private capitalist system. This will be one of the greatest transference of asset ownership from collective to private status in the history of mankind – perhaps a little grandiose but the point still stands. Just this past week alone there were a series of developments which underscore this rapid pace of change – easy to dismiss any one of them, but when viewed collectively a clear pattern emerges.

  • The 2014 Report on Foreign Investment in China, issued by the University of International Business and Economics in Beijing (20 years ago it would have been hard to imagine that such an entity would even exist) determined that there was $118 billion of foreign direct investment in 2013 in country, of which $62 billion was in the services sector (up 14% year-over-year). There is a clear rotation away from manufacturing investment by foreigners in China.
  • German Chancellor Merkel welcomed Premier Li in Berlin last week and announced 110 new cooperation and investment agreements aggregating to $18 billion in value. In the midst of all that fanfare, four leading German “economic institutes” announced that German GDP would grow 1.2% in 2015 – which is awkward when your guest is nervous about 7.3%.
  • After Germany, Premier Li spent three days in Russia signing only 40 agreements. Obviously Russia is anxiously tilting toward China as the rest of the world shuns the Kremlin – which further bolsters China’s role as a Super Power.
  • The Chinese seem to be on a US “shopping spree” – the $2 billion acquisition of the Waldorf Hotel in New York City was announced last week. The Rhodium Group estimated that another $10 billion of acquisitions would be announced shortly.

And given my professional interest in healthcare, I focused intently on developments in that sector, which were everywhere last week.

  • It was announced last week in Beijing that foreign entities can now directly invest and operate joint venture hospitals in China, while Hong Kong and Macau based investors can own and operate hospitals outright in certain selected cities. This was confirmed with great excitement by senior hospital executives I met with while in Shanghai.
  • The local healthcare issues are significant. Cities outside of Beijing in northern China reported air quality levels 20x worse than healthy levels. In Beijing on Saturday PM 2.5 pollution particles measured over 500 micrograms per cubic meter of air – that should really be closer to single digits.
  • It was World Mental Health Day (October 10) while I was there. The China Daily reported that the 6,910 mental health specialists in Beijing were overwhelmed treating the over 50,000 patients (didn’t strike me as all that bad until I read on…). The Chinese Center for Disease Control and Prevention estimated – wait for it – that there are over 100 million people in China with mental health “problems” of which 16 million were classified as with “very worrying conditions.”
  • Ebola was referenced but seemed to be characterized as an “African issue” still (although admittedly that might be unfair just reading three days’ worth of local newspapers).
  • The China Daily reported that “Sexting Still Popular Activity in US Despite Risks” – so it is not just the Chinese that are confronting these serious health risks!
  • And lastly, this same newspaper, which was only 12 pages long, dedicated one entire page to covering the NBA, undoubtedly appealing to some of those people with mental health problems.

2 Comments

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2 responses to “Shanghai Trip Report….

  1. mark levin

    Thanks Mike for the update on China. I love it
    mark

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