- April 24, 2013
- Meet the Power Couple of the East
On the “2013 TIME 100” annual list of most influential people in the world, you’ll likely recognize a few power couples who individually made the list. President Barack Obama and First Lady Michelle Obama were named two of the world’s most influential people, as were the “royal couple of culture,” Jay Z and Beyoncé.
Another dynamic duo may surprise you. They are China’s new leader, President Xi Jinping, and Chinese First Lady Peng Liyuan.
Not only is Xi the president of China, but he also holds the three most powerful political titles. He is the Secretary General of the Party, the Chairman of Military Commission and President of the Nation.
His wife, Peng Liyuan, is very familiar with the limelight. She was once more famous than her husband, as she sang patriotic songs in the People’s Liberation Army.
Peng is very different from previous Chinese first ladies, who were typically invisible to the rest of the world. But given her charm and popularity, the first lady will help broaden the appeal of China, according to the Financial Times.
“From John F. Kennedy to Barack Obama, U.S. presidents have used their spouses to help improve their image at home and abroad. But the decision by the easy-going Mr. Xi to break with Chinese tradition signals his recognition that China must find new ways to make friends, as its global rise triggers fear and suspicion around the world,” says the Financial Times.
Perhaps making TIME’s list is the first step in completing the president’s goal.
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- April 3, 2013
- Shanghai’s Long Road to Prosperity
The cover of our latest Shareholder Report features the bustling Nanjing Road in Shanghai, China.
U.S. Global Research Analyst Xian Liang was born and raised in Shanghai and says the road holds special significance to the country as it has more than 170 years of history. Below, our investment team snapped a photo of Xian with his parents, along with my assistant, June Falks, while walking along Nanjing Road back in 2011.
I asked Xian to share a short summary of Nanjing Road’s long history with our readers. Here’s what he told me:
After China lost the First Opium War to the British in 1842, it was forced to sign the Nanjing Treaty with the United Kingdom, mandating the opening of five Chinese ports, including Shanghai, for international trade.
At the time, Shanghai was an ordinary fishing village, but when the area officially started its development in 1843, it grew to become the largest city in the Far East, with Nanjing Road becoming the earliest and busiest commercial street after the birth of modern Shanghai. The treaty opened the floodgates for foreign goods, capital, businesses, banks and concessions. Wealthy Chinese merchants also set up shop here.
By the 1930s, Nanjing Road, although primarily known for its “10 Chinese miles (about 3 miles) of foreign enterprises,” saw even more local businesses flourishing as a result of World Wars, which diverted western attention to China. Its prosperity earned Shanghai the nickname “sleepless city.”
The road has seen its share of devastation as well. The anti-Japanese war (1937-1945), civil war (1945-1949), and hyperinflation (1948-1949) wreaked havoc on Nanjing Road. Then when communists took over China in 1949, ownership transitioned from a capitalist economy to socialism.
During the Cultural Revolution (1966-1976), the city experienced its absolute lowest point, when 90 percent of the longstanding specialty stores were smashed by mobs.
Since then, the area has been restored to its former glory, with a large portion of Nanjing Road revamped for pedestrian traffic only.
Until today, for those who consider themselves “old-school Shanghainese,” Nanjing Road is a symbol of nostalgia. On this street, Shanghai’s first pay phone appeared in 1882; running water introduced in 1883; the first street car in 1908; and the first passenger elevator in 1906. Nanjing Road first exposed the average Chinese to British textiles, French cosmetics, Swiss watches, American appliances, German tools, Swedish enamel, Czech glassware, and Japanese towels.
With 600 stores and 1.7 million people visiting every day, Nanjing Road continues to make history as one of the longest shopping pedestrian streets in the world.
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- March 18, 2013
- Why China is Tunneling a Mind-Boggling 800 Miles in 2 Years
Would it surprise you to discover that China is planning to add 800 miles to its subway system over the next two years? That’s the distance equivalent to building a network from Dallas to Chicago in less time than the U.S. Congress can resolve a budget!
In 2015, when the infrastructure build-out is complete, China’s subway track alone will be a mind-boggling 1,900 miles, according to JP Morgan.
The Asian giant has been in the midst of constructing the world’s largest transportation system, laying mile after mile of high-speed rail and subway track. According to the World Metro Database, Beijing and Shanghai currently have the longest metro and subway systems, with about 275 miles each. The city of Guangzhou in China also falls in the top 10, with 144 miles of rail, beating Paris’ network length of 135 miles.
This ambitious program is part of the pragmatic solution to help 1.3 billion residents move around the country efficiently and reduce the increasing problem of air pollution due to car emissions in big cities including Beijing.
The circulating reports and photos of Beijing’s smog have recently become a dark cloud hanging over the country’s remarkable achievements, but it’s not a new issue. In the winter, smog conditions can seem much worse. Pollutants tend to linger when the air is heavier and colder compared to lighter, warmer air during the summer. In addition, the city is located near the Gobi Desert and has always been subject to sand and dirt storms, even back in the days when it was called Peking.
The U.S. experienced similar sand storms during the Dust Bowl in the 1930s, which caused catastrophic ecological and agricultural damage to the American prairies and made the economic impact of the Great Depression much worse. Sixty-five percent of the topsoil was blown away and millions of people were left homeless.
Industrialization in Beijing has certainly aggravated the matter, but Beijing is not the first city suffering from its horrible haze. The London smog of 1952 caused 12,000 total deaths, resulting in the Clean Air Act of 1956, and according to the U.S. Environmental Protection Agency, Manhattan suffered particularly poor air quality in the 1960s, affecting the eastern edge of the U.S.
Because of the government’s concerted effort to encourage consumption and help its residents achieve a higher standard of living in previous five-year plans, new cars congested the roads as fast as they were paved. Over the past decade, sales accelerated from less than 5 million vehicles in 2002 to nearly 20 million in 2012. About 114 million automobiles are now registered to Chinese residents, with ownership exceeding 1 million across 17 Chinese cities.
As we’ve discussed many times, the country is also the world’s largest energy consumer, with a huge dependence on fossil fuels, especially coal. You may think that the country’s use of coal would be the single largest factor driving air pollution, but, in Beijing, emissions from vehicles make up a bigger percentage. One-fifth of the fine particulate matter, which is made up of nitrates and sulfates, organic chemicals, metals and dust particles, comes from automobile and truck emissions in the city, according to JP Morgan. Across the entire country, automobiles cough out 27 percent of total nitrogen oxide emissions.
With residents dealing with increasing cancer-causing pollutants and vehicle congestion on roads, public discontent is rising, “adding particular urgency to causes such as environmental protection and public sector reform,” says JP Morgan.
China’s government policies were already addressing air pollution by “requiring thermal power plants to install desulphurization systems and progressively increasing vehicle-emission standards,” according to the research firm. As one recent example, last May, I discussed Beijing’s additional subsidies devoted to energy-efficient products, including fuel efficient cars, LED lighting, and high-efficiency motors.
This year, leaders appear ready to continue these environmental priorities. In comparison to last year’s budget, a larger portion of government spending will go toward environmental programs. While other areas will see a decrease in spending compared with last year, spending on environmental protection is projected to grow nearly 19 percent, says JP Morgan.
With a concrete plan and a budget in place, it all boils down to execution and enforcement. And in March, the once-in-a-decade transfer of power became official, as the National People’s Congress in China elected Li Keqiang as premier and Xi Jinping as president.
Xi now holds the three most powerful titles in elite Chinese politics: the Secretary General of the Party, the Chairman of Military Commission and President of the Nation. This “triple-power strength” positions him as an ideal reformer for China. He may likely have little interference from former leaders, giving him a freer hand to tackle some of the growth challenges in China today, including reforms to improve environmental protection.
We look forward to watching these leaders in action.
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- February 15, 2013
- 9 “Early Adopter” Ideas For Investing in Emerging Markets
Do you know the seasonal pattern to China’s equities during the Chinese New Year? Going back 10 years, based on median returns, the Shanghai Composite Index rose 3.46 percent, while the China H-Shares climbed 4.32 percent in the month following the week-long holiday.
Successful investors seek to be early adopters. They tend to quickly recognize trends and historical patterns in the macroeconomic environment in an effort to seize potential opportunities. The seasonal effect around the Chinese New Year is just one trend investors can take advantage of. Here are a few others for you to ponder:
- World Trade. In 2012, the country became the largest trading nation in terms of imports and exports of goods, beating the U.S. by $50 billion. According to Bloomberg, goods coming in and leaving the U.S. totaled $3.82 trillion, while China’s trade in goods rose to $3.87 trillion. China is increasingly becoming an important trade partner in the world.
- Oil. Urbanization is having a tremendous affect on energy demand. By 2030, China could be a leading energy importer, replacing the U.S. as the world’s largest oil importing country by 2017, says BP.
- Shale Gas. Outside North America, China is expected to be the most successful in the development of shale gas. By 2030, shale gas may be 20 percent of total gas production in China, says BP in its Energy Outlook 2030. To gain access to the technology and best practices, Chinese oil companies have joined forces with major international oil companies as its shale-gas industry ramps up.
- Urbanization. By 2020, China is anticipated to have 850 million people living in cities, which is about 60 percent of the total population, according to the Urban China Initiative. Growing urbanization should drive higher incomes and an increase in domestic consumption.
- Consumer Goods. While 97 percent of Chinese households had a television in 2011, only three-fourths of households had refrigerators and washing machines. However, the penetration rate of many durables is happening at an incredibly sharp pace, with Deutsche Bank anticipating that China will reach the levels of developed country by 2020.
- Gold. Imports of the yellow metal into China from Hong Kong reached an all-time high in 2012. The country imported more than 834.5 metric tons of gold, according to Bloomberg. The World Gold Council expects purchases of gold jewelry and investment will go on rising at a steady clip in the Asian nation.
- Growing Consumption of Gold. The country remains the second-largest gold consumer in the world, but growth in gold consumption should be higher than the world’s largest consumer, India, says the World Gold Council.
- Luxury Goods. By 2017, China is set to be the second-largest luxury market, surpassing Japan, Italy and France. While the U.S. is still projected to remain the top country in luxury-goods sales, China’s maturing retail markets means that there’s a growing love for luxury in the country.
- Tourism. The Chinese are not only buying luxury items when they’re at home. As one example of the tremendous thirst for brands such as Louis Vuitton and Burberry, Chinese tourists traveling through London’s Heathrow buy about 25 percent of luxury goods at the airport, even though China’s tourists only make up 1 percent of passenger volume.
Are you an early adopter of emerging market trends?
None of U.S. Global Investors Funds held any of the securities mentioned as of 12/31/12.
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- February 13, 2013
- How They Spend It In China
Would it surprise you if I told you that Chinese visitors traveling through London’s Heathrow today buy about 25 percent of luxury goods at the airport, even though China’s tourists make up less than 1 percent of passenger volume? This buying trend has been influencing the type of goods sold at the terminal, especially during this Chinese New Year.
This is only one example of how Chinese consumerism has significantly changed over the past 20 years. Within the country, more and more residents are relocating to the cities to get higher paid jobs and acquire discretionary income. In addition, government economic, social, rural and welfare policies are influencing the cost of goods. You can see the changes in spending through Jefferies Equity Strategy team’s pie chart comparison. In its special report, “China 2025: A Clear Path to Prosperity,” the research firm compares urban spending across major categories in 1995 versus the spending habits in cities in 2011.
In 1995, “a lion’s share” of Chinese spending was on food; by 2011, this amount decreased to a third of total consumption. In 1995, the second biggest category was recreation, education and cultural, at 9.4 percent, and this increased to 12.2 percent 16 years later. However, in 2011, the second-biggest expense was transport and communication, as hundreds of thousands of migrant workers travel to see their families.
Clothing made up 13.5 percent of spending in 1995, and although the percentage spent in this category dropped by 2011, it still comprised 11 percent, which figures in “economic growth and the influx of global fashion brands and culture.”
To see what consumption spending might look like 12 years from now, Jefferies studied four decades of consumption patterns, spending behaviors and how the retail format has transformed not only in the Asian giant, but also in developed countries. The firm believes that the “Chinese economy is set to enter a ‘post fast-growth’ era where a consumption-driven model is facilitated by accelerated urbanization, enhanced social welfare and fast changes in lifestyle.”
Specifically, spending on basic needs, such as food, clothing and housing, will continue to decline as a percentage of per capita consumption. Luxury goods, on the other hand, will likely “enjoy much faster growth” than other consumer goods, as residents become wealthier and have access to global fashion. Jefferies believes China’s gifting culture along with its business network will be a “resilient platform” for luxury good demand.
As I pointed out to Investor Alert readers last Friday, reforming the hukou registration system will likely have a tremendous influence on China’s economy, and this is especially true in the consumer space. For the China Region Fund, we believe stocks in the consumer discretionary sector will profit from the increasing renminbi in residents’ pockets.
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Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc.
Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. By investing in a specific geographic region, a regional fund’s returns and share price may be more volatile than those of a less concentrated portfolio.
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