#1 Investment Weekly – Superficial impressions

China has impressed me in two ways in the past fortnight. The first occasion was with the superficial management of the recently finished Olympic Games. The second was the economic management of the recently built port city of Xiamen, which I visited last weekend (which explains why there was no newsletter last week).

The Olympics have acted as a watershed for great nations in the past. Hitler’s Germany was at war with the world three years after the shameful propaganda of the Berlin games of 1936. The Iron Curtain fell 10 years after the Moscow games (which were affected by a mass boycott of nations). Conversely, Korea’s brand value sky rocketed after the Seoul games, while the Tokyo games of 1964 have been credited with kick-starting the emergence of the Japanese electronics economy of Sony, Nintendo and the like.

Which road will China take now that the games are over? Of course, I’m hoping for the latter, because I’m living here! But secretly, I’m also hoping that the games will bring about further, peaceful, political reform in China. It won’t be easy. China’s leaders are deeply concerned about the unity of the vast nation they command (we now know that the 55 children holding the flag at the opening ceremony were all Han Chinese, even though there were supposed to represent the 55 different ethnic minorities of China), we also know that Beijing is concerned about China’s image of a nation of laborers and farmers (hence there expulsion from Beijing during the games and the education of the masses to not spit and generally act peasant like in front of visitors), and finally, that the nation as a whole has been a “victim of foreign aggression” on many occasions in the past two hundred years (so naturally, China is very wary of having this happen again). By opening up to the world, through the Olympics, China is hoping for a better understanding of the issues confronting China by non-Chinese.

Unfortunately, understanding China’s issues will probably only encourage outsiders to press for the following changes: 1) trust your people 2) give them the right tools to lift themselves out of the poverty that most have to endure, and 3) believe that the aggression of the past will not be repeated. All these issues can be resolved through political reform. No amount of infrastructure spending will bring these changes about.

Impressions are everything, and that is what the Chinese were attempting to achieve at these Olympics. This explains the vast amount of propaganda dished out before and during the games. But it also extended, rather annoyingly, to the actual competitions. It is no co-incidence that half of China’s gold medals were won in events that require some form of human judgment. China swept all before them in gymnastics and diving (16 golds). They also won gold medals in boxing, wrestling, trampoline, taekwondo and judo. On the other hand, China only won four gold medals in events that required the Chinese athlete to do something faster than anyone else (windsurfing, rowing, swimming and canoeing). By contrast the US only won three gold medals which involved human judgment (two in gymnastics and one in wrestling). The US’ haul of gold in events that require speed were 21 out of their total of 36 (mostly in swimming and athletics). One other point: China’s women won more medals than the men (with 15 gold medals in judgmental competitions that generally require the wearing of skimpy outfits), and, as a percentage of medals won by a country, they achieved the highest amongst teams that produced more than 20 medals, at 59% of all of China’s medals (most countries’ women managed ~40% of a nation’s medals). I’ve always had a soft spot for cute Chinese girls (I married one), and apparently the judges have too.

Therefore, the Olympics’ original motto of mankind performing “higher, faster and stronger” barely applied to China’s performances. In a way, China’s athletic performances were as glamorous and as superficial as the opening/closing ceremonies. It has been noted in many quarters that the games were lacking the sort of fun that was present at the Sydney and Seoul games. This should not come as a surprise when you consider that the show was being run by hard-line, Soviet trained, Marxists. Superficiality cannot be translated into fun, particularly when you are not competing or participating for your own enjoyment, but rather for the good of the state.

For a visitor to any of the Olympic cities, I am certain they would have been impressed with the physical infrastructure they saw and used. Although the southern coastal city of Xiamen was not an Olympic venue, I’m sure that it could have matched anything the other cities had to offer. The whole town seems to have been built very recently, and the skyline is well populated with half built towers (funded by Hong Kong property developers). The airport is clean, new and airy. Roads leading from the airport are wide and well built. The first thing a visitor will notice when leaving the airport is the large number of foreign car dealerships congregated at the exit of the airport. It is very clear that Xiamen natives like their cars. Yet, the roads are not particularly cluttered. Most roads are tree-lined, providing shade for pedestrians and motorists from the strong tropical sunshine. There was little or no pollution that I could see during the three days I was there. I can understand why this city of 5 million souls was voted China’s second most livable city – after Dalian.

But beneath the façade of trees and new buildings and sunshine lies a more sinister issue – security. Everywhere you look, there are signs reminding citizens to dial 110 if they see something unlawful happening. The fact the sign is also written in English is even more worrying for a foreign visitor. When one also considers that most residential buildings in the town have heavy metal bars covering windows and balconies, then, the impression crystallizes – the people of Xiamen are worried about something and are taking measures to avoid it happening to them.

In a sense, what I saw in Xiamen is a microcosm of China’s political, social and economic issues. Even in a police state the population does not feel safe. There is little recourse if a corrupt official decides to take something from you, while the haves are fearful that the have-nots want to take (or re-distribute) their new found wealth. No matter how much the government wants to implement capitalism with Chinese characteristics, the transition from centrally planned to free market must appear to distribute wealth unevenly. You can build as many new buildings and roads and airports as you like, but if the software is not right the computer will not run and outsiders will eventually cotton on that the hardware/propaganda is empty and superficial. How China’s leaders handle these issues will determine whether the Olympics will really be seen as a watershed moment; or simply just another sporting event used by a paranoid leaders to show off how insecure they are.

Returning to Xiamen, one can witness at first hand the huge opportunities that the Chinese economy has to offer to an investor. The airport was not particularly busy (even though a major typhoon had just passed to the south disrupting air traffic), but that should change as direct flights to Taiwan become more frequent. The prospect of more visitors should not be an issue for the town, there appears to be plenty of spare capacity around to accommodate a new influx of economic activity. The hotel I stayed in was not particularly full.

So what does all this talk of Olympics and branding and superficiality have to do with the short to medium term outlook for the Hang Seng Index? Not much really, the index has been testing the 20,900 level, in volatile turnover, trying to figure out if 20,900 is enough of a decline or not. I would say that the psychology of investors has turned so negative, that we are getting very close to the bottom of the current cycle, and that what we are experiencing right now is superficial, with an underlying fear that something dreadful is about to happen. Whatever transpires to tip the index to the low, I do not believe the index will stay there very long. There is too much cash on the sidelines, while the shorts will cover hard, producing a V shaped bottom.

#28 Shirt T

The climate in Hong Kong is hot and sticky for a large part of the year. In order to take the heat out of the heat, many people wear T-shirts. This post will list the various types of T-shirts worn, and why they are so popular.

The polo: The dreaded polo shirt has become the standard wear for most Hong Kong men, and what a fashion disaster it has become. Hong Kong’s affinity to the shirt really started with local rag merchant Crocodile, ripping off Lacoste’s idea and running with it in the 1970s. The clincher was turning the Lacoste crocodile symbol the other way around, and naming the company Crocodile. The shirt is worn by all social levels to indicate a form of casual dress, with several sub-strata emerging within the overall spectrum. Starting at the top is the golf playing, wine-guzzling CEO. He will generally have a whole wardrobe full of polos in different colours and mostly by Ralph Lauren or Lacoste. The polo will always be tucked into his beige pants. The wannabe executive will have several polos, but will differentiate himself by buying the grotesquely enlarged polo symbol version. The tail will always be hanging out. Mainland businessmen always wear polo shirts, but they are invariably striped, horizontally, and the material is thinner. The shirt will match his clutch bag, and will be tucked into his pants. And finally, delivery guys/girls like their company issued polo shirt so much they refuse to take them off – ever.

 

Football shirts: For a town with no sporting heritage of any kind, Hong Kong men are quite into sports. However, this passion doesn’t extend to actually playing sports, but rather it consists almost entirely to the wearing of sportswear – in particular, the wearing of the England football team’s shirt. This is quite interesting, because as far as I’m aware, the England football team is rubbish. Still, this has not deterred Hong Kong man from walking around in England football shirts and T-shirts.

 

The demand for England shirts can reach stunning proportions, with sales ahead of major matches accelerating appreciably. I remember going to Mark’s & Spencer ahead of an England World Cup game and being told that the England T-shirt I was holding were selling like crazy. I told the cashier that if England lost its match with Argentina I would return the shirt as part of M&S’ not satisfied pledge. A Beckham penalty sealed the win, and I kept the shirt on until the bizarre loss to eventual winners Brazil.

Other countries’ football shirts get credible mentions in terms of popularity, with Germany and Portugal having quite a good following. The former because Adidas sells them and because Hong Kong football-shirt-wearing man has an eye for a nice colour – apparently the Portuguese mauve shirt is quite appealing. I have never seen anyone ever wear a China national football shirt, or, for that matter, a Hong Kong shirt. I suspect this may have something to do with the fact that the performances of both are even more pathetic than England. However, I do find it quite odd that so many people like to wear the shirt of a country that most have never been to, certainly have never lived in, probably would consider to be former colonial masters, and generally, is completely useless at winning things. I can imagine that the Communist Party propagandists must be spinning in disbelief at the thought of so many Hong Kong Chinese men walking about wearing England football T-shirts, rather than the football shirt of the motherland. I have an idea how to change this later on in this post.

Football club shirts are, of course, a mainstay of club revenues, and also allow the wearer the opportunity to show a more micro-allegiance, going beyond simply supporting a country. If I had to guess, I would say that most football shirt wearers Hong Kong proudly wear the red of Liverpool Football Club – not Manchester United. I would guess that Manu would come second, with Arsenal up there too. Chelsea is also well represented. The other popular shirts are Madrid and Milan, but their presence is well below any of the England clubs. Why wear English football team shirts? I suspect that live Premier League football matches every Saturday night would have a lot to do with it. Being able to legally gamble on all of the matches makes the issue a no-brainer. English football fulfills all the criteria when it comes to Hong Kong man’s entertainment 1) an excuse to get away from their scratchy Hong Kong women 2) an excuse to get down the pub and have two beers (usually enough to get Hong Kong man well and truly tipsy) 3) an excuse to make a large amount of noise (whether tipsy or not) and 4) a reason to bet on something (Hong Kong’s only real pastime). Wearing a football shirt also gives the impression that the wearer knows something about football (which they do not), or maybe might know something about English football (which they definitely do not), or that the wearer may even play the game (which they cannot). It is possible to see Hong Kong men trying to play football at the many sports pitches around town. For an aficionado of the “beautiful game”, watching a local football match can be a terrifying experience. If you want a good laugh, then head to the football pitches in Lok Fu on any evening.

Vests: Although a vest isn’t a T shirt, it’s used as one here. Old men are known to walk around town wearing nothing above their waist but a vest. The vest must be white (or slightly grey). There are plenty of hawker stalls and old fashioned department stores that sell these vests under the brand name of White Rabbit or some other sort of name, like Snow Brand – basically anything representing the colour white. These stores should be closed down, and banned, but I’m sure an underground system of getting your sweaty mitts on a new white vest would soon spring up. My theory about the wearing of white England football shirts stems from the fact that the England football shirt wearers would have seen their elders wearing their white vests and they are continuing the tradition. For the propagandists looking to increase the wearing of China’s football team shirt in Hong Kong, here’s a tip: make a white away-strip version – sales could rocket.

Sequins: T shirts with sequins are about as low on the taste/style scale as you can go. So it is not surprising to find that middle-aged women in Hong Kong enjoy looking like disco balls. In fact the passion for sequins isn’t confined to T shirts, but to shoes, bags and, in fact, anything they can think of. I suspect that sequins and Hong Kong have some sort of affinity, because, the women now wearing sequins were the textile workers that hand stitched the T shirts of Hong Kong’s sweat shops of the 1970-80s. However, one would have thought that they would be positively sick and tired of seeing, never mind wearing, sequins, having toiled with them for much of their formative years. In a touch of irony, although you would never see any self-respecting young woman wearing a sequin T shirt in Hong Kong, they do make up for this by wearing fake nails covered in glittery bits. In a sense, the young women of today are making their intentions known, that the sequined T shirt has a long future in front of it.

Half mast T shirt: This is a really gross sight, seen quite often in Hong Kong. For mostly old men, with as large a pot belly as possible, lifting the T-shirt to expose the grossness underneath is considered nothing but ordinary – except the lesbian that once sued an old newspaper seller for displaying his sweaty gut every morning. She thought it was extraordinary and offensive. She was right, but the courts threw the case out. The reasoning from defence council was simple: if the judge decided to throw every gross and offensive stomach/T-shirt in jail, there wouldn’t be enough room. Defence concluded that you can’t fine a chap for having no decency or taste.

#1 Investment Weekly – Collectivism over Liberalism

I’m really enjoying the Olympics. There’s so much to write about. I don’t remember Athens or Sydney providing so much food for thought. China’s medal haul has been unbelievable. The Communist Party propagandists, that are running the show, have been in full force, hoping that the dent to consumer confidence from the huge decline in the Shanghai Composite in recent weeks will be compensated by the massive amount of Chinese winners at the games.

The rise in patriotic fervor has reached fever pitch, which means the deflation in confidence, when the games are over, could be rapid. When the medals are fully counted, expect a switch in emphasis back to the ailing financial markets. In the meantime, weakness will prevail, and a test of the 20,900 level on the Hang Seng Index is inevitable this week. Whether the index holds there will be a key test. So far, it has been a no touch zone – probably because it is too hot a place to go (i.e. it’s too important).

China’s hot hand at these Olympics has been amazing. Of the 91 gold medals awarded at the time of writing, 28 (or a third) have been won by China and Michael Phelps the American swimmer (if the former was a country he would be lying sixth in the medals table – but his total haul of six individual gold medals over just two Olympiads means he is not the greatest individual Olympian, he’s just a very good swimmer). The narrow base of winners is concentration-risk bordering on the infuriatingly boring. Add the fakery at opening ceremony and a question needs to be asked – how much of what we are seeing and reading is real?

There have been shock upsets (this is what really makes sporting events truly wonderful to watch – the unpredictability), but it appears that the upsets are all being achieved solely by Chinese participants (China just beat Taiwan at baseball!). Unbelievable is usually the first word used whenever a Chinese wins a gold medal – because the commentator can’t believe the extent of the improvement in the performance just witnessed or because of the massive chips on the shoulders of the western press.

Home advantage is apparently helping, although the half empty stadiums suggest that this has not been a great help. I watched Li Na beat world number one Venus Williams and number three, Kuznetzova of Russia, in quite empty tennis arenas. The Chinese girl is ranked 42nd in the world and has never beaten either of them before. Apparently, the upcoming US Open is far more important for Williams than winning a medal for your country. An overweight Chinese woman won the 200-metres butterfly, from nowhere, screamed the SCMP. So what is behind the surge in medals for China? I believe it’s a victory for “winning for the collective good” rather than the individual. It’s a victory for Collectivism over Liberalism. These are two powerful political forces, but, whereas socialism/patriotism is drummed into all Chinese from cradle to grave, liberalism/choice/greed is, by its very nature, much more difficult to instill. Anyone in capitalist Hong Kong seen not supporting China’s efforts is given very dark, threatening, looks. The other issue is face. Look at the ratio of silver and bronze to gold medals and you can see that China is not interested in second and third places. Face is a very powerful propaganda tool.

Here’s an example of the difference in mindset: an amateur British boxer failed to make the weight and was deeply disappointed. Not because he had missed the chance to win a medal for his country, but because he was promised a US$2 million professional contract if he had won in Beijing. I’m not sure what monetary gains the little Chinese girls that won gold in the synchronized gymnastics would be getting, but it’s probably not a lot. We know that one of the Chinese gymnasts will be celebrating her next birthday (not sure which) at a training camp (read gulag). The Chinese participants (I can’t call shooters athletes) put in the excruciatingly hard work for the sake of the motherland – pure and simple. And when you stand in front of 20,000 screaming countrymen and women, you had better perform, or heaven help your family and fellow colleagues/sufferers.

Talking of synchrony – today is the 18^th of the eighth month of the year 2008. It is almost as auspicious a day as the opening ceremony date – with its dominant number of eights. The China internet chat rooms are full of talk that the Shanghai Composite, which has been managing gold medal performances in diving, could close on the final day of the Olympics at 2,008 (-18%). No one is talking about it reaching 2,888 (+18%).

To be honest, all these eights are muddling the issues. So here’s a brief summary to ensure that we keep the investment focus in perspective: Conditions for Hong Kong equities are better than good right now because: 1) the stronger US$ (as ECB finally realized that raising European interest rates would be suicidal) (see newsletter June 16th – Cut to burst the oil bubble) has resulted in 2) lower oil/commodity prices (Merrills reports that only 11% of fund managers are overweight commodities compared with 56% a month ago – when bubbles burst they always do so quickly) which has resulted in 3) an easing of inflation pressures, causing 4) market interest rates to fall allowing 5) US equities to hold up quite well (unchanged since July 23), but 6) China’s markets have tanked (Shanghai -14%, Hong Kong -6%).

Performance-enhanced divergence – inversed

 It is the last point, the divergence of performance of US and China equity prices that requires some explanation. Is this another piece of computer trickery? or miming? or some form of enhanced performance? Is it possible that someone in Beijing has a chart of the Shanghai Composite upside down (see above)? What happened to serving the motherland?

There is no doubt that the Beijing Olympics are being used by the Chinese authorities to project an image to the world. Unfortunately, this image seems to be: we are in complete control, we do not trust our people, we will do anything to achieve our goal of being number one at everything, we are afraid of criticism and have completely forgotten that the people we are trying to impress are only interested in materialism and not patriotic twaddle. Whether the authorities will come to their senses before August 24, regain control of the market and halt the slide in the Shanghai market will determine the short term direction of Hong Kong equities. Keeping the stock market artificially afloat is no different to using tech to make a firework display, or asking a girl to mime to someone else’s singing. Until the propagandists wake up, expect new lows for both Hong Kong (<20,988) and Shanghai, despite the positive changes that have occurred since June 24. 

#27 It’s criminal

As a general statement, I think it is fairly true to say that Hong Kong is a relatively safe place to live. I can walk the streets of the roughest parts of town in the middle of the night, and feel quite safe. All I need to do is speak a few words of English. Part of the reason for this sense of security is that criminality here is generally confined to two groups (domestic and triad). In other words, crimes are mostly committed against others that one would know. I suspect therefore that the three crimes that I have been involved in were quite rare cases, and are, therefore, quite the minority of crimes here.

The first incident took place on the south side of Hong Kong Island. I can’t exactly remember why, but my girlfriend at the time and I were at a friend’s party in Aberdeen somewhere. We left the party early and decided to stop at a park bench for a bit of…how do you say…necking. Suddenly, while we were engaged, I felt a slight tap on my shoulder. I looked up, and in the meager lighting of the park, were three imposing shadows. When the middle shape realised he had attracted my attention, he barked, in a slightly timid way: “cheen”. Even then, I knew that cheen means money. The girl knew this too, and let out a welp. Despite the threatening situation, half alone in a semi-lit, empty, park, late at night, sitting in front of three figures asking for money, with a quivering girl by my side, I felt no fear whatsoever. So, I stood up, quite abruptly. This sudden movement, took the figures quite by surprise, and they all, in unison, took one step back. At this point I realised I was dealing with a trio of harmless amateurs. I decided to take my wallet out of my jacket pocket, and opened it up to see how much money was in it. Not much, as usual, but I suspected that a one hundred dollar note would probably suffice. So I removed it and passed it to the middle figure. I turned to the girlfriend, who was having kittens on the bench, to make sure she was alright, and turned to find that the three “attackers” had already left.

I’m not really sure if the second story is really one involving a crime, but I thought it criminal just the same. I was with a group of relatives and friends at a Chinese New Year gathering in Central. We have just watched the firework display over Victoria Harbour, in someone’s office in Exchange Square. Because we couldn’t hear the noise of the fireworks, through the windows, we had to make them ourselves. Anyway, we were walking around a desserted Central when suddenly my aunt’s six foot Austrian boyfriend got into a fight with someone. Fists flew at a frantic pace. This is where I believe the crime may have been committed, because bloody fighting in the streets could be classified as affray or something along those lines. Anyway, for some reason, probably the alcohol I had consummed, I thought it would be a good idea to try and stop the fight before someone got arrested. This was not a good idea, as the elbow to my right eye produced a really nice shiner. It was my aunt that eventually restored order, and first aid to the swelling below my damaged eye.

The final part of this trilogy of criminology is far more serious. It had been a standard feature of previous summer holidays for my wife and children to remain at my parent’s house in England for a month, while I would fly home after my two weeks were up. This arrangement was undertaken as usual in the summer of 1999. I was home alone, when I woke up one Saturday morning to find that the verandah door was partly open. This was quite odd I thought as I approached the open door. What was even more strange was that my wallet was lying on the verandah floor, along with other bits and pieces. It then dawned on me that the house had been robbed. I immediately went to look for my wife’s jewellry box, and couldn’t find it. I called the police. Within four minutes, the door bell rang. I opened the door to find a motorcycle policeman asking if I had reported a robbery. I ushered him in. Within 10 minutes of his arrival, the whole flat was crawling with policemen, ranging from uniformed lads, to plain clothes detectives. The speed of their arrival was astonishing. I explained what had been stolen (a beautiful Rolex watch I had bought in Milan, some of my wives’ costume jewellry, a US$5 note given to my son by a girl at school, a gold chain and cross from my son’s baptism etc). They noted everything down and dusted for finger prints. My ID card was left behind, it was of no use to them, but my credit cards could not be found. The police asked me to cancel them, which I did. Only to find that my cards had not been taken either, they were on the verandah, under a pile of stuff. As the team dusted some more and looked for clues, I made a pot of tea. They asked me the usual questions about how long I had lived in Hong Kong etc. I explained that I was quite relieved that I had not woken up and that the thieves hadn’t attacked me or taken my Henry Moores, that were hanging up clear as day. After a while the police asked me to go the nearest station, in Kowloon Bay, and make a statement. To my surprise, as we left the building where I lived, there were several news photographers hanging about downstairs waiting to take my photograph. They were quite disappointed that I wasn’t someone famous, but they snapped away anyway. I refused to pose, and stuck my toungue out in defiance. I assume they picked up the story from the police radio. After making the statement, I asked the detective where the nearest ATM was, because I had no cash (as usual, but this time I had a good excuse) for taxi. They told me where to go, and off I went. It was only when I put the card in the machine that I realised I had cancelled my cards. Walking back to police station, after having been robbed, with no cash, and no family, was a major low point of my life. I eventually found the detective who took my statement and asked him if he could lend me the fare home. He did, and I returned to the station a few days later and repaid him. I didn’t tell my wife about the robbery. I didn’t want to ruin her holiday. She eventually arrived home. Before she did, I had bought an identical jewellry box and even bought a US$5 note. As she got in the lift, she noticed a sign warning residents that there had been a robbery, and that everyone should be on their guard. She read it and didn’t suspect a thing. I remember her face when I broke the news. I asked her if she had read the notice in the lift. She said she had. I explained that the notice was referring to us. She burst out crying.