My China Experience: Observations and Impressions Part 2

In my first essay on my recent trip to China, I mentioned the theme throughout my trip was one of dichotomies—East meets West, ancient meets modern. Nowhere was this more evident than in the wide chasm of attitudes among the Chinese people regarding their heritage and their future.

Preserving the past—the hutongA hutong is a neighborhood characterized by narrow streets and alleys. In 1949, some 3,000 hutongs stood in Beijing; today, only about 1,000 survive, the rest destroyed to make way for new roads and high-rise apartments on the city's most prime real estate. Very recently, the Chinese government realized that by destroying whole neighborhoods, they lost much of their history and tradition. The remaining hutongs have been designated as protected areas in an attempt to preserve this aspect of Chinese cultural history.

Our group went by rickshaw to a hutong and met with a family who lived in one of the remaining protected hutong areas in a neighborhood that resembled what all of Beijing looked like twenty-five years ago. These family members were crafting greeting cards and doing calligraphy in a courtyard hutong that measured 1,500 sq. ft. They were considered rich since they were allowed to live there, as just one family. In most homes, up to ten families live all around one small square courtyard. Because the hutong are close to downtown Beijing, they are prime real estate. Our guide let us know that this particular courtyard is valued at about $11,000 per square foot—a rate equal to the real estate in New York City or Hong Kong. Although private citizens may own their homes in the hutong, no one can own the land. The government can take them over without providing adequate compensation, in some cases leaving the owners insolvent. You can read more about the issues surrounding hutongs in this article, published by The Atlantic in 2012.

After enjoying a lovely tea with the Chinese family, we purchased some of their cards and exquisite pen and ink drawings. That’s when I spotted, on a table in a corner of the courtyard, an ancient (from the 1980s?) Quotron machine, with the stock market quotes running at the bottom. An old man, hunched over the table, was practicing the ancient art of calligraphy, producing items for sale to the modern tourist, and watching the Hong Kong stock market. This was another stark example of the ancient and the modern living side-by-side—or in this case, under the same roof in a courtyard in a hutong near a modern version of ancient Beijing.

Private citizens in China can purchase shares in Chinese companies through A-shares that trade on the Shanghai Stock Exchange (SSE). These shares trade in yuan and are available to foreign investors only through a tightly regulated qualification program. However, foreign investors may purchase non-voting B-shares, which are quoted in U.S. dollars, or may purchase ADRs that are traded on the U.S. exchanges. The SSE lists just under 1,000 companies with a total market capitalization equivalent to approximately USD $2,595 billion, in contrast to the NYSE, which lists 1,867 companies with a total market capitalization of USD $16,613 billion. The largest stock exchange for Chinese companies is actually the Hong Kong Exchange, which is open to foreign investment. National accounting standards in China are converging with international accounting standards; however, a 2013 report by Transparency International ranked Chinese companies as the least transparent among those in the emerging markets.i Purchasing stock in a Chinese company directly involves more risk because of this lack of transparency.

Speaking of transparency . . .

The Internet—access to the few, the powerfulOne example of how, in the midst of this seemingly modern world, the government controls the daily lives of its citizens is lack of access to the Internet. There you are, looking at the skyline and thinking that this is the most modern country in the world, and yet you can’t access Google, you can’t get the BBC, you can’t get CNBC. The way the Chinese government controls the information flow to its own people was shocking. Baidu is the Chinese language search engine, and that’s available to people with computers and other devices, but the controls and censors prohibit wide searches—net neutrality is not a given.

[Side note: We have so many freedoms here that we simply take for granted. We often fail to recognize how fortunate we are to be able to say, "Hmmm, I don’t know the answer to that—let’s Google it." Any information we want is at our fingertips. What was the war of 1812 about? Google it. What’s Russell Crowe’s most recent film? Let’s Google it. What’s the definition of the word "freedom"? Google it.]

Some people can get Yahoo, which is interesting because Yahoo owns 20% of Alibaba, China’s main online shopping site. This very week, Alibaba is on the road in the U.S. to generate interest in their initial public offering (IPO), expected in a few weeks. Most (if not all) shares will go to institutional investors. You can read more about Alibaba’s "road show" in this article from the Wall Street Journal.

All broadcast media are owned by, or affiliated with, the Communist Party of China or a government agency; there are no sanctioned privately owned TV or radio stations. So broadcast news and information and entertainment are government news and information and entertainment. But, mobile device use is huge and mobile devices are everywhere—you see people everywhere wired into something. Samsung is big. Apple has gone into China, with great success. I am very happy that Apple is one of the largest stock positions in our portfolios.

Here’s another puzzling "How can this be so?" for which I have no ready answer: China is a communist country and Alibaba is a huge Chinese online shopping site owned by Chinese billionaire Jack Ma. Yahoo! Inc. owns 20% of Alibaba, and Alibaba filed for listing on the NYSE in June 2014. "How can this be so?"

One thing that I thought would become very clear while I was in China was how capitalism can exist in a communist country. How can Alibaba list on the NYSE? How can Baidu be on the exchange? I thought, "Oh, I’ll figure it out." But I learned that the answer is much more complex than I anticipated. More on that in my next update: Communism, with nods to capitalism.



Photo credit keyword "hutong"