Saturday, November 12, 2016

A Special Report: Your Portfolio Manger’s First-Hand Experiences in China

I had spent the majority of October traveling in China. It is a complex country, and anyone who reduces it to a sound-bite like “all Chinese companies are frauds” or “China’s empty skyscrapers proves it is a massive bubble waiting to pop” is doing a grave injustice to the truth1.

This past trip was the second time in two years that I’ve been to the fastest growing major country in the world. In aggregate, I’ve spent approximately a month’s worth of time in the mainland, mostly in the Sichuan province, but have also spent ~25% of the time in Beijing. I've tried to not just glide through as a simple tourist but to try to feel what it'd be like to live there day to day, to, to my utmost extent, imagine what my hope dreams and fears would be if I were amongst the citizenry.

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The first impression anyone will have of China is the sheer amount of people in the country. I've lived in American metropolises most of my life, Los Angeles during formative years, then New York for seven years, and perhaps the only apt comparison is that of Grand Central at around 6 PM on a weekday. That would be the median feel. Peak traffic hour feels like when the President is in town and half of the city is gridlocked due to blockades. Or when Penn Station is suffering from technical problems on the Wednesday before Thanksgiving.

The effect is you quickly adopt a very visceral fear of congestion. There is no time or space to be polite. If you try to be a gentleman and you will be consumed by the crowd, stuck in stasis as people nonchalantly push you aside. Any hope of getting anywhere or completing any errand within a decent timeframe will require you to "do as the Romans" and ratchet up your inner aggression. Push forward. Cut into any lane with an open space. Speak loudly in quick clips for any request. Brandish hyperbole liberally. And you will find that, in contrast to the stares and reprimands you may get in western nations for being rude, people generally acquiesce as if it's common protocol, which in a weirdly unwritten way, it is. For example, drivers being suddenly cutoff in traffic strangely generates no road rage. There is copious honking but more of the hi-I'm-in-your-blind-spot-don't-hit-me variety rather than the long, loud, F-you variety. My father-in-law more than once drove on the wrong side of a (small) road, very casually telling me after I startlingly pointed it out that it's because it's less congested on this side.

Beijing subway circa 1800 hours on a Friday

China’s single minded goal of economic advancement has been made into a rallying cry: 趕英超美 — “Chase down England, Surpass the United States”. It is capitalism by edict. The outcome has been wealth creation on a magnificent level, but at the same time, jaggedly uneven. Shooting into the skies in Beijing are modern towers of marvel, but walk a few blocks in any direction and you’re bound to pass ancient dilapidated structures or holes in the wall hawking their wares. The energy required to power this capital of 11 million produce choking pollution that, on bad days, feel like a perpetual sandstorm and such frequent traffic gridlock that it saps the will of its populace to commute beyond the part of town where they live/work. China’s smartphone apps are the most sophisticated in the world, in which you can conduct or receive almost any service you can imagine. However, the delivery mechanism for those services are often grunt laborers biking through smog and congestion, dropping off the food you ordered or delivering the package you sent out or giving you their patented 5 minute haircut or whatnot.

The pursuit of prosperity and the displays thereof has permeated into the culture. Consumerism is the holy text. My wife walked into an old bookstore that she used to love, but left ten minutes later, confused and irritated that the bookshelves are now dominated by how-to’s on getting rich instead of holding volumes representing the diverse tapestry of culture that is China. And while manners are still very much intact in between friends and family, I got the impression it has eroded between businesses and their customers. More than once I’ve witnessed unhappy exchanges in restaurants, drink stands, and stores, the patron certain he or she has been bilked and the waiter/waitress or customer service rep either being forced to take a berating or arguing back aggressively. Such quickly triggered naked displays of dissatisfaction are, it seems to me, symptoms of no longer viewing the other party as a human being but instead as merely the opposite side of a transaction.

This extreme imbalance of population versus available resources and the barely disguised worship of wealth explains a lot, in my opinion. Why do Chinese companies have the reputation of being shady? Because there's less incentive to trust and more incentive to take what they can upfront. In financial parlance, it's the prioritization of Present Value versus Future Value. The discount rate placed on Future Value is extremely high because you never know what tomorrow will bring. Competition amongst 1.4 billion people is maniacal and rule of law is less established than in the west. Also remember: it's not even been one generation since the country exited the Cultural Revolution and advanced out of an agrarian-centric society. The collective memory of the Chinese citizenry have no basis to extrapolate how the future might look. If you have the chance of grabbing a bird in the hand right now versus the mere possibility of two in the bush tomorrow, it's a no brainer. Close your fist and run. Tomorrow is not guaranteed because there's nothing in history that implies it would be. Most importantly, if you don’t take “what’s yours”, someone else will.

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On the upside, the work ethic of the populace is undeniable. The desire for a good life, a better life, is intense. The primary and secondary education system is light-years ahead of the U.S.  Kids attend long after-school tutoring sessions beginning at a young age and teachers are respected—the best of whom are as popular as rock stars and get paid like it, resulting in a virtuous cycle of attracting the best talent to the teaching profession. Young adults right out of college in Beijing bust their butts like Wall Street investment bankers regardless if they are in finance or not. Leaving the office before midnight is an early night.

It’s no coincidence that Chinese multinational conglomerates like Huawei and Dalian Wanda are eating the cake of its competitors in the global marketplace. The lazy explanation is they have the tailwind of unfair trade agreements, but don’t discount the fact that they just work a lot harder and are not wasteful corporations. In this kind of environment, progress seems inevitable. Mistakes will be made, sure, but as Charlie Munger has said, mistakes are a part of life. The important thing is how fast you scramble out of them. China will plow forward interminably because its citizens are tireless and there are literally billions of them. Those empty skyscrapers will be filled sooner rather than later2.

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1Adding further to this complexity is a personal wrinkle: I was born in Taiwan, a country that is ancestrally Chinese, colonized and modernized by the Japanese, and became the refuge of the Nationalist Party after their defeat by the Communist Party during the civil war, stayed from its certain demise only because they savvily secured the United States’ obligation to defend them during the height of the anti-communist wave in the ‘50s. In other words, although I look and speak the same language as those in China, I was brainwashed as a child to believe we are not one; to, indeed, believe China is a country to be suspicious of and feared.

The truth, of course, is much more multifaceted, and given its antiquity, perhaps never to be unraveled in its entirety. Over the course of decades, good or bad fades away and gives way to tragedy for we all inherit the sins of our fathers. Long story short, I feel fortunate to have developed an independent mind and to have met my wife and her family who is from the mainland. I continue to be fascinated by my own history – learning about China will be a life-long interest.

2“An Update On China's Largest Ghost City” – http://www.forbes.com/sites/wadeshepard/2016/04/19/an-update-on-chinas-largest-ghost-city-what-ordos-kangbashi-is-like-today/#6005ae331e08