Last year Andrew Hupert from Diligence China was kind enough to invite me over to the Itv-Asia office and pepper me with questions about china’s 2nd tier. For a number of reasons, I have just now figured out how to embed (i.e. shamelessly promote) this video.

A few things have changed factually since the video, but I still believe in the fundamental issues that I run through, highlight, and stutter over.

If you have trouble viewing through this post, click over to ITV’s site, but for those in China I should just warn you ahead of time that it is slow no matter how you cut it.

Continue reading »

One of the things I love about China, is that “China experts” can have worked in the same city, assisted largely the same firms, be roughly of the same intelligence.. and yet disagree on things that one would think were fundamental.

The first time I witnessed this in China (keep in mind I used to watch a lot of CNBC), was at an AMCHAM where you had three economists debate what was going to happen with the RMB.. and just how undervalued it was.

The next experience I had was when I moderated a panel on real estate in Shanghai (a pretty well discussed topic you would think), and the differences between investors, economists, and agent expectations was fascinating.

more recently though, it has been over the topic of China’s market size, and more specifically the size of China’s middle class. Type it into google, and you get a pretty decent range of opinions… 57 million … 10o million… 200 million.. and so on.

One of the most vocal critics of the big 200 and above numbers is the well known Paul French, and it is he who for a while stood out from the crowd and said that China’s middle class is not as large as others would say.. and it is definitely not in the 200 million range

And when I saw the recent Youtube (h/t Danwei)of Paul French taking shots at JWT’s Tom Doctroff - also considered to be very well versed in China, I realized that the fight was spilling out into the street… one Old China hand against another!

Like Thomas Crampton, I too would like to hear Tom’s reply to this. for me, I know each equally well, which is to say that I have seen both of them present and heard good things about both. My view on the middle class is that (1) you cannot trust any statistic (2) you cannot base your numbers on luxury sales and (3) it is surely more fragile than anyone would like to admit.

UPDATE - Doctoroff Responds to French

Continue reading »

A few months back I met with Dan Inman to discuss what I had been seeing in my time in China, related to China’s 2nd and 3rd tier growth, and this week his article was released on CNBC’s European Edition.

Trading Places take a mixed approach of looking at the macro picture and then bringing in the thoughts of people on the ground, and I would suggest readers who are interested in China’s 2nd and 3rd tier to take 5 minutes to read through it.

Besides myself, the perspectives from a number of others have been included to give the article a nice flavor of the opportunities and challenges that face foreign investors when looking at this environment.

In addition to this article, CNBC also highlights a few others that they have written
How Agile Is China?; Chinese Cities Beyond Beijing. Welcome to the 10 Chinese cities that are now coming of age; Chinese Brands The Chinese companies not to be missed in 2008; China Opener - Introducing the world’s next superpower

For those interested in my writing on China’s 2nd tier, you can see the profiles I have written here

As a quick follow up to a post I made last week, I am becoming increasingly concerned about the energy situation in China. It is something I have been thinking about for quite a while, and was unfortunately proven right a few months ago. more importantly though, I have been seeing a number of signs (Shanghai commercial lights off @ night) and hearing that there are still rolling power outages in what are typically areas with enough energy.

Then, Forbes last week reported that More than 70 pct of China power firms making losses,

the China Electricity Council said that 40 pct of China’s 4,773 power firms made losses in the first two months of the year, and that profits were down across the board as a result of record high coal prices, fixed tariffs and the freak weather conditions that struck southern China over the period.

and, today the People’s Daily China’s power coal reserve falls to 12 days amid rising prices

The nation’s entire coal reserves slumped to 46.69 million tons as of April 20, down 12 percent from 53 million tons in the early March, said Wang at a news conference on Tuesday.

The national stockpile was only sufficient for 12 days of consumption, three days fewer than the March record. Coal inventories for plants in Anhui, Chongqing and Hebei were only enough for less than a week, he said

But, more than these stories, where I would like readers to focus, is last week’s Reuters article China to update rail lines to boost coal supply where some real insights into just how difficult the problem will be short/ medium term will be (I have added the numbers):

1. Some 19 lines linking top coal areas in the north to ports in the east would be updated or rebuilt, increasing transport volume to 1.7 billion tonnes, said Dong Yan at the Institute of Comprehensive Transportation of National Development and Reform Commission.

2. Some 200 million tonnes of coal was taken by truck each year from producers in places such as Shanxi, Inner Mongolia and Shaanxi to ports in the north and east

3. China’s coal consumption would rise to 3-3.1 billion tonnes in 2010, and to up to 3.3-3.7 billion tonnes in 2015, which compared with 2.54 billion tonnes in 2007, driven by strong demand from power plants, Dong said.

Add all this together…

Continue reading »

Bill Dodson from This is China writes a piece in Euro Biz this month entitled Parts missing that looks at some of the difficulties a few friend are facing when entering China’s interior market of Chongqing.

It is one of those pieces that will surely get a lot of reads, because he is right. Chongqing is missing some hardware, a lot of software, and for many firms it has yet to develop the local market necessary to warrant real interest from a lot of firms.

why this article is interesting is that Bill’s writing reminds me of conversations I had 5 years ago with investors about Nanjing and Chengdu. they were in Shanghai, they were in Beijing, but when I mentioned Nanjing or Chengdu… the response was “where?”

In one case, I was working on a 10 million USD investment for 6 buildings. the development firms had gone bankrupt, creditors were knocking LOUDLY, and we had exclusive right to it. We spent two days going over the sites, mapping the locations, and building the models based on current market conditions and a general understanding that Nanjing was about to see a huge economic jump over the next 5-8 years that would make these properties really really sexy.

The result of our analysis was that without doing anything, investors would make 200% within 6 months (the lock out period) by simply flipping the properties.

200% sounds attractive right?

well… after meeting with 10 investment groups based in Shanghai, and more based internationally, we came to a single conclusion that 15% in Shanghai was better than 200% in Nanjing because investors really did not understand the fundamentals of China. It wasn’t that there weren’t opportunities. It was that these opportunities required some background, a little imagination, and patience.

Continue reading »

9 months ago, McDonald’s and Yum (parent company of KFC, Pizza Hut and Taco Bell), were being flame broiled as part of a large labor scandal.the controversy surrounded paying their college students below the accepted levels, and as with a number of big stories in China, it was a battle fougt out on BBS and in the news.

Well, it appears that just 12 months after 94% of 47,839 Respondents Believed that Yum and McDonald’s that reports accusing Yum and McDonald’s of paying illegally low wages are true, Yum has been recognized as one of China’s top 10 employers.

As an undergrad at Missouri, I was introduced to one of the tenants of international trade economic theory, the Heckscher-Ohlin Theory.

Its premise is simple:

By specializing in production, and by trading with other countries, it is possible for countries to increase their incomes. Even though countries as a whole benefit from specialization and international trade, all groups in society, workers and capitalists, do not gain according to the Heckscher-Ohlin theory.

to be honest, the more I time I spend in the real world, I am not sure how closely the tenants hold as there are a number of factors that go simply beyond the constraints that they were working with in the 1940’s.

Continue reading »