Yangtse Revisited
(25 May 1997)

I have just returned from a two-week trip with a delegation of investment leaders -- members of the Russell 20:20 -- visiting the area of the Three Gorges dam, Beijing, Chongqing, and Hong Kong. Some of it was ground, or water, I had first seen in the early 80s, traveling as part of the second group of foreigners to go up the Yangtse since the "Opening Up." And what a revisit it was!

The magnitude of the Chinese transformation cannot easily be comprehended. One-point-two-billion people whose economic contribution grows at ten percent a year. You see it in their clothing (when I was first there, it was all denim . . . now it is well-dressed, even working in the fields on a Sunday). You see it in the neatness of farms that would be a credit to a Swiss . . . producing for a nation largely without hunger. You watch the drive and determination of commercial and government leaders. They are obsessed by accomplishment. It is an economic miracle.

I spent the weekend with a long-time, respected friend, Lou Jiwei, one of the principal architects of the successful anti-inflation policy and now challenged as vice-governor of Guizhou Province, the country's poorest. We know each other to learn from our shared opinions as friends who do not need to be hindered by diplomatic politeness.

From the top . . . the images that stick in my mind.

1. The 17-year, largest dam project in the world -- the Three Gorges. It will be done, Chinese style, meaning there will be no failure despite that it is a massive effort. A water level increase of 175 meters, one-million-plus people moved, and maybe $80 billion dollars. It is needed to fulfill the central government's commitment to get the interior onto the same economic plane as the coast.

Work seemed very slow to my eye. But it was "on plan." My hunch is that construction lending has been curbed. China is going it alone on this project and to not finish it would be a big loss of face. It will happen but with huge sacrifices along the way . . . some may have started with the slow pace we observed.

2. The growing anti-American feeling. When I first went to China, America was number one, largely from movies and overseas Chinese. Now we have lectured them on so many items they consider to be internal. The "conflict with China" arguments are valid concerns . . . beneath the surface but very strong.

3. Capital is needed for infrastructure projects: roads, dams, power. These are not attractive investments for foreigners, in my opinion. Rather, investment in the things that benefit from them will be.

4. I would only invest with a Chinese partner, whether mainland, Taiwan, or Hong Kong. The way of doing business there is so foreign to Westerners that we cannot make the leap.

5. Hong Kong will go well. Every major country has an extra-territorial place and Hong Kong is it for China. There is good morale there in those who have stayed.

6. The internet is a boon for China. The world's knowledge is available to them for free, instantaneously, and without American concerns about copyrights. They know it is important and will grasp it.

7. The US's Asia hands were good professionals. But US foreign policy is increasingly made by Congress, not State Department pros. I do not see that getting better.

8. An industrial over-capacity problem. Our group saw two auto plants operating at 10% of capacity; I saw an outstanding noodle factory doing even less. Industrial zones are struggling. Success stories are there, but they are not in the majority. You have to go there for the long term only.

9. Labor costs are rising, and the business attraction is domestic markets not export opportunities.

Best businesses to invest in are consumer products, financial services, and travel.

10. There can be political accidents, but the Chinese seem to have that under good control. I am not so sure about American policy to China being under similar good control.

Overall Asia has to be the cornerstone of an international portfolio, with China the most important driver of it.

- Dean Lebaron

Note: I also invite you to read a more detailed account of the trip, written by Yafei Yin, a former Batterymarch colleague, who accompanied the delegation to China. Yafei's trip notes, "On the Road with the Russell 20-20, Two Weeks in China and Hong Kong," will be found in the "Articles" section of "futurebytes."