Stay Down Brother, Stay Down

I’ve visited more than 30 different countries. But this is my first visit here.

For the past three days, I’ve been in a country where I can’t drink the water from the taps.  The poorest people have no access to running water—or electricity.

From where I’m typing, I can see a Church, but I wonder: is it a place of worship, or is capitalism the god in this foreign country labeled communist.  Belching smoke spews out of factories like it would have during Europe’s industrial revolution.  The air quality in most of these cities is toxic.

I arrived at my hotel on a train, from the airport, that cruised on magnets instead of wheels.  We hit 300km/h, and it felt like we weren’t even moving.   Rather than the smoke belching two stroke engines from Tuk Tuks and motorbikes in places like Bangkok, Thailand, or Hanoi, Vietnam, many of the scooters here run on electric power—or they’re simple bicycles converted to run on the fruits of hydro.

In case you haven’t guessed it, I’m in China.  Shanghai, China, to be exact.

My thoughts?

The city is rapidly developing, and getting cleaner each year.  It might represent the future for China, or it might be a symbol for something else.

Delving into the local publication, The Beijing Review, I can read about local concerns.  Among them is the wealth disparity, which smacks even the most obtuse visitor in the head.

Keeping thy brother down is likely very important here, whether people will admit it or not.  When one country can build a modern skyscraper, using its own citizens who are paid only a couple of dollars an hour, you get two things:  an increased wealth disparity, and a potential for social uprising.

Much of the money earned by the wealthy, according to the May 27, 2010 issue of The Beijing Review isn’t going towards social programs.  Last year it was estimated by China’s National Economic Research Institute that more than $705.8 billion U.S. dollars (4.8 trillion yuan) went undeclared as income.  So much for the possibility of soon being able to drink water out of the tap.

Historically, wide income gaps such as China’s has led to revolt by the poor.  We know that there are enough of them here to significantly affect the bubble the wealthy live in.

If you’re interested in investing in China, my feelings on that are even stronger than before.  Their highest income earners are getting rich.  But those same people are holding their brothers down.

To capitalize on China’s growing wealth, buy the stocks of name-brand western products.  That’s what they want.  They want Porsche, BMW, Audi, Rolex, Cartier jewelry, Starbucks, McDonalds.  We might buy “cheap stuff made in China” at Wal Mart.  But the biggest spenders over here are like most Asians: Enamored by the high-status western products.

Buy those stocks if you want to grow wealth, but keep your money out of here. 

You never know what can happen when you hold your brother down too long.





Andrew Hallam

I’m a financial columnist for Canada’s national paper, The Globe and Mail, as well as for AssetBuilder, a financial service firm based in Texas. I’m also the author of Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School (2nd Ed. Wiley 2017) and The Global Expatriate’s Guide To Investing: From Millionaire Teacher to Millionaire Expat (Wiley 2015). My mission is to educate, motivate and inspire people on basic retirement planning and best practices for investing, using evidence-based strategies. I’m happy to comment on your questions. However, please read the Terms of Use, Privacy Policy and the Comments Policy.

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21 Responses

  1. Kevin says:

    Andrew, i had lunch with someone who grew up in shanghai, and the pursuit of wealth is one of the reasons he left. That kind of lifestyle is not for everyone. That, and the more repressed nature of china which has recently been on the decline but still runs in the society.

    I agree that large wealth gaps can lead to social problems, but perhaps the memories of what happened the last time the rich were purged are still fresh in Chinese minds. The country was set back decades and millions died due to those mistaked.

    It is my hope that the chinese start consuming more of what they produce and stop holding themselves down by furthering mercantilist policies. Would the chinese continue to step further out of the way of the process of wealth creation, and stick to punishing cheaters and criminals, the chinese's standard of living will continue to improve, as it has for the past two decades.

    I don't know if the nature of chinese society will ultimately allow for this. With rule of law, low corruption, and low intervention (see hong kong or singapore, very capitalist yet stable examples of where this works), i think they can do well. Though China is huge and much more diverse than one would think; If the emphasis is on cities, the incentives are better for good governance. They have the benefit of history and can learn from their own mistakes, and our mistakes as well.

    Finally, a rising China provides a much-needed kick in the behind to the western world to wake up, and stop living off the fat of the land. I appreciate our western freedoms, but our western welfare state on the other hand is spoiling us like rotten children. It's the difference between raising strong kids and raising dependent ones…. And most asians i have met kick our butts here, because few of them feel entitled.

    Great post Andrew. Looking forward to reading your thoughts!

  2. I've never been to China, but my impression from watching Japanese TV is similar to what you have described. These programs have shocased the penthouse living arangements of the owners of toy factories (the owners always refused to say who they were contracted by, but I would guess it means they make Barbie dolls etc.) yet there is squallor on the streets.

    It sounds like China and Japan have some similarities… I own a Japanese index fund, but to really capitalize on the Japanese consumer, a wise investor would buy shares of Louis Vuitton, Tiffany, Coach, and Afflac.

    Hope you make it home safely. Careful of what you type! 😉

  3. Thanks Myke,

    And your advice to be careful might not be a joke (as I'm sure you're aware). At traffic lights, photo flashes go off constantly. Google access is intermittent, and from what I understand, nearly everything is monitored that can be.

  4. Mich @BTI says:

    Hope you're enjoying the trip Andrew. Even though I never set foot in China, my father in law travels there twice a year and he never ceases to repeat that with the stellar growth of china one day we will be working for them!

    One wonders if this is only the beginning of prosperity?

  5. Maybe he's right. They have done some remarkable things in a short amount of time. It's truly fascinating growth. And their appetite for western luxury items seems insatiable. And many of them can easily afford them. But at the same time, our school has a charity project club called "Aiding China" that helps the poorest of the poor in that country. And despite the flashy modern aspects of places like Shanghai, they still have poverty extreme enough to make us all cringe.

  6. Anyone who follows Jim Rogers might say your story could be a bit of a confirmation of his theory that the next 10 – 20 years will be a great bull market in commodities due to China and India's growing middle class, the massive infrastructure upgrades taking place in those countries, and as people get more affluent the improvement in their diets and its impact on ag products. What do you think?

  7. @The Biz of Life

    Hey Biz,

    I think it's definitely possible. But it's interesting when we look at improved diets. I wonder if you could argue that the westernization of their diets is going to have the opposite effect on their health. There's also the damage of a free market running rampant. I asked some expats living there about the food. Has a trememdous thirst for capitalism now ensured that DDT is sprayed on crops for exportation (and internal use)? They suggested that there are no safety governing bodies on the food there–and they believed that anything and everything is used to sell. Two women I spoke to said that they do their best not to eat anything from China at all. That must be tough for them. I was only there 4 days, and I couldn't find vegetables that weren't from China. I don't know. What do you think? The old farming methods may have been much better. I haven't read the China Report (on food consumption as it relates to cancer in China) but there are "Blue Zones" there where people live well into their 90s, thanks to a high, organic veg based diet. And that, I think, might become a thing of the past.

    I think I saw Jim Rogers at Starbucks a few months back. I thought about sitting down with him, but I figured I'd leave the guy alone. He lives here in Singapore.

  8. @Andrew Hallam

    This reminds me of the damaged cause by melamine a while ago. It makes you wonder what is safe to eat from there, if anything. This is one detrimental side effect of the rise of such a massive population.

    P.S. It's not a genuine free market if there's no recourse to punish or sue if you fall sick from said food. In a real free market, you're free to succeed or fail… there should be no protections against damages if you harm others! Perhaps I use the term differently than other people do, though.

    I have to read up about this again, but I believe some Chinese protein requirements lead to the melamine issues. When it finally came out, they executed a couple of scapegoats, but I don't know if the victims were fairly compensated. I think this goes back to your earlier point, Andrew, in that it's safer to invest in what China consumes rather than in China itself. The legal landscape just isn't developed enough, yet.

  9. Kevin@InvestItWisely says:

    @Andrew Hallam

    This reminds me of the damaged cause by melamine a while ago. It makes you wonder what is safe to eat from there, if anything. This is one detrimental side effect of the rise of such a massive population.

    P.S. It's not a genuine free market if there's no recourse to punish or sue if you fall sick from said food. In a real free market, you're free to succeed or fail… there should be no protections against damages if you harm others! Perhaps I use the term differently than other people do, though.

    I have to read up about this again, but I believe some Chinese protein requirements lead to the melamine issues. When it finally came out, they executed a couple of scapegoats, but I don't know if the victims were fairly compensated. I think this goes back to your earlier point, Andrew, in that it's safer to invest in what China consumes rather than in China itself. The legal landscape just isn't developed enough, yet.

  10. Rogers has been trying to talk up a major bull market in agriculture commodities for a couple of years now, which hasn't quite come to fruition yet.

  11. Very interesting article Andrew. I haven't been to China (yet) but I too, have gotten the same impression.

    How do you feel when you see that – opulence at one corner and around the next, utter poverty?

    I know it makes me second guess my life and my lifestyle, not that it's extravagant by any means…

    I think Shanghai, New York City (I've been a few times) and a few other cities in the world are unique; rare; where extreme poverty and wealth co-exist so closely.

    Stay safe,

    Cheers,

    Mark

  12. @Kevin

    Kevin,

    You brought up some interesting points. And I agree with you.

    Here's something that might be worth a further ponder. You mentioned that

    " They have the benefit of history and can learn from their own mistakes, and our mistakes as well."

    There's something very ironic about this. In China, I couldn't use facebook or any other form of social media (ie twitter). The massacre at Tiananmen square didn't offically happen. OK–we know that it did, but any mention of it on the television in China, and a fuzzy screen comes up to block it http://en.wikipedia.org/wiki/Tiananmen_Square_pro

    With an ability to forget history like that and perpetually censor everything, can they really learn from mistakes?

  13. @Kevin@InvestItWisely

    Hey Kevin,

    I like the way you think. Your quote here is particularly interesting:

    " In a real free market, you’re free to succeed or fail… there should be no protections against damages if you harm others!

    There is so much "face" at stake in a country like China. Yeah, Scapegoats can be executed. But are they executed for delivering a harmful product, or are they punished for bringing humiliation to the country? Considering that there are no food safety regulations in China, I would suggest the latter. You've really brought up such a fabulous point with your definition of "free" market.

  14. @The Biz of Life

    Hey Biz,

    Maybe he was partly right. Having read his book, "The Adventure Capitalist" around the year 2002 (ish) he was talking it up then. And commodities have soared in price since then. But as far as I understand, he's still on that wagon. And he may end up being right. I don't know.

    What do you think?

  15. @Financial Cents

    Hey Mark,

    It makes me feel pretty strange when I see such a disparity of wealth. I suppose there's nowhere more extreme than India. But I wonder if there should be a difference between having extreme poverty right next door, or having it around the world. I mean, we don't see it everyday, so perhaps we see it as an excuse not to make serious efforts to make the world a better place for the "have nots". Can we hide behind the distance while condemning those who see it everyday and potentially do nothing about it. I, for one, don't do anywhere near enough. I selectively donate about $10K to $15K per year to some cool, third world, empowering organizations, but I know that this isn't a lot in the big picture. And if I'm very aware of the disparity, and if that's all I can part with each year, you can easily see why and how the wealth chasm widens. I'm part of the problem if I'm not more committed to becoming a bigger part of the solution.

  16. @Andrew Hallam

    It's interesting, because from what I have heard, the society used to be so repressed that people were afraid to speak out about *anything*. Dinner conversations were understandably very stilted and awkward. Nowadays, people are a lot less reluctant to speak out their minds on different subjects, at least in the relative privacy of a dinner room.

    Regarding Tiananmen, I find it very unfortunate that China still resorts to censorship and that things like that have happened in the past. It seems rather 1984ish that they would revise their history in that way. Nonetheless, the rest of the world still remembers, and I think that they have learned from many of their mistakes, especially events like the Cultural Revolution. However, you are quite right that they have a ways to go.

    By the way, isn't this a problem in countries like Japan, as well? I guess you wouldn't expect it from a non-communist country, but aren't they still in basic denial of events like the Nanjing Massacre?

  17. @Andrew Hallam

    Very good point. Face (mian zi) is a very important concept in China, and one of the things I sometimes find uncomfortable when I encounter it, since in the Western world people are usually all too free to speak their minds. With a Chinese person from China, you can't be as certain as to what they are really thinking, due of this concept of face.

    How can we solve the food safety problem? I personally don't trust their government to do a good job of it; heck, even here in Canada we still have outbreaks of listeria. This is really a legal problem and not a regulation problem. If you have a good legal system, you don't need to add a regulation that says "do not add melamine". If nobody knows that melamine is harmful, then the government will not regulate it until after people have died. That's after the fact. If we do know that it's harmful, then there is no need to regulate it if you have a good legal system, because if the product is harmful, you had better not add it if you don't want to face lawsuits!

    Why? Under a fair legal system, any company that released products that resulted in the deaths of many people would be plundered under the lawsuits required to compensate the victims. The China solution of killing off a couple of managers really does not do anything to restitute the victims.

    The problem here is that there is a lack of transparency, and it's in the interests of the Chinese government to keep everything "hush hush". Therefore, they will naturally favor industry participants over the rights of their own citizens.

    I think having multiple certification agencies, both public and private, could be a partial way around this problem. The problem here is that I don't think the government will allow it, since if you have someone blowing the whistle it kind of disrupts China's "face", doesn't it!

  18. @Kevin@InvestItWisely

    Hey Kevin,

    I think we're all so similar, regardless of which country we come from. It's just circumstance and history that, perhaps, makes us view things a certain way. You're right about Japan. They have also altered history. But I'm sure the British did the same thing—and perhaps we're still doing it today, based on which side of the fence we're sitting on. When I visit the U.S., I sometime flick onto an almost National Enquirer channel, masquerading as News. It's called Fox News (I had never seen it before). But I sat with a group of smart people the first time I viewed it, and as soon as the program started, I thought I was watching Enterntainment Tonight. Anyway, the company I was with thought it was news. I thought they were putting me on at first. They were, after all, pretty smart people.

    To be honest, some of the best news I've seen on TV comes from the BBC, but I'm sure somebody with a stronger grasp on history could tell me some stories about them.

    We also have our own issues with "face"–like China does. And bias. Our bias and "face" issues are just a bit different, I guess. Yet we might be more similar than we think.

  19. Haha. I've seen a few of those Fox News shows, too. To be fair, they do sometimes have decent ideas, such as from Hayek or Hazlitt. A lot of the other stuff though I have to agree with you.

    People are similar underneath it all, but we respond differently to different incentives. Das Experiment and the Stockholm syndrome come to mind… :S

  20. woodes34 says:

    Were you in Jinqiao Andrew? It sounds very much like the area of my last school, and very much like the attitude about life we encountered daily. Glad you were there for a short visit. It is not a place I wish to return to soon!

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