A Financial Revolution 

April 10, 2006
North Face Anyone? China and IPR
I made a quick stop at the Silk Market in Beijing to pick up some gifts for colleagues back at the office (Pashmina shawls for $2.25). The Silk Market - formerly Silk Alley comprised of small shacks creating little alleys of knock offs - is in a shiny new building where you can buy pearls, clothing, silk items, electronics, and more. With a little bargaining, shoppers are picking up North Face jackets ($18), Louis Vuitton bags ($4), Hermes scarves ($1.50), DVDs ($1). Of course, they aren't authentic. Occasionally the government cracks down on the knock offs, but brands and intellectual property are seldom protected in China.

Here are a few examples of busts from today's China Daily newspaper:
  • In Beijing, officials seized 4,000 counterfeit bottles of Coca Cola
  • In Xinjiang, officials seized counterfeit industrial vehicles
  • In Beijing, officials seized counterfeit high-end luxury goods (Gucci, LV, Mont Blanc) at a convention
  • In Shanghai, officials seized 15,000 pieces of fake clothing (what is fake clothing, a cloth swatch pretending to be a shirt?)
  • In Fujian, officials seized 612 bottles of counterfeit Xue Jin beer
  • In Zhejiang, officials seized 5,700 Crocodile logo items and 11,400 Playboy brand items

The limited attention to intellectual property rights (IPR) hurts businesses that own the brands. As a result, many companies are cautious about entering the Chinese market. This is a loss for consumers and businesses in China as well as the owners of the intellectual property.

There are, however, some signs of hope. The government owns the Beijing Olympic logo and they have been relatively quick to crack down on non-licensed products. In addition, large Chinese companies are starting to develop internationally-recognized brands - Haier, Huawei, Lenovo. These companies are spending significant resources to build their brands and they want protection from infringement.

But the problem for China's economy is not just IPR, it is a lack of innovation. China is the assembly plant for the world's goods. There is very little innovation or product improvement happening here. If China can transition to a country of innovators they will add greater value and earn more revenues. It can also create more opportunity for the educated Chinese middle class. That may in turn solve the IPR problems. If China has in-country brands and technologies it will be in the interest of the government and industry to protect it.

There was a time that "Made in Japan" meant a product was junk. Japan moved past manufacturing cheap, low-quality products to providing innovation. Today, "Made in China" is often associated with products of questionable quality. Will China follow Japan's lead and move to higher value added manufacturing? That is the critical question to China's long-term economic growth.

Is My Hand In Front of My Face? China's Pollution Problem
Air pollution has been a major problem for China for many years. A decade ago the problem was people burning coal in their homes. Today, in most large cities the residents use electricity instead of coal and they use it not only for cooking and heating, but to power their TV, stereo, PC, appliances, and more. As a result, the coal burning has simply shifted to from millions of households to large power plants. In addition, the number of vehicles on city streets doubles every few years.

The result of this explosion in energy demand is obvious to anyone who visits Beijing, Shanghai, Guangzhou, Hong Kong, or Xi'an - pollution! Today's pollution in Beijing reached an index value of 500 (it was probably higher, but the index doesn't go beyond 500.) At that level, concentrations of pollution are more than four times the levels established by the World Health Organization.

In addition to the obvious health effects, the pollution is a significant drag on the Chinese economy. World Bank reports estimate that 8% of GDP is lost every year because of pollution. This is due to damage to productivity (worker illnesses and death), buildings and crops, and a number of other effects. It is also affecting the appeal of Chinese cities for foreign investors.

The Financial Times had an article last week announcing that Hong Kong's ranking as a desirable place for foreigner's to live fell sharply because of pollution. That means companies are deciding not to invest in Hong Kong because their HQ employees don't want to work there. Looking at the picture above of today's air quality at Tiananmen Square in Beijing, it isn't hard to see why people might think twice before moving their family to a "smoke-filled room".

The Chinese government is stepping up efforts to address the pollution problem. Especially as 2008 and the Olympic games in Beijing come closer. However, the task is Herculean and the Chinese national environment agency is small (it numbers less than 300 employees for the entire country.) But the State Council declared that the 11th Five-Year Plan will place great emphasis on reducing pollution (the goal is 10%) and increasing energy efficiency (the goal is 20%).

The problem doesn't only affect China. Pollution from China (and India) travels to the US and, in some places, has a significant impact on air quality. More than 40% of mercury pollution in the US comes from China. It is in the US's interest to promote cleaner, greener growth. And while the opportunity is huge for US companies that produce pollution control devices and energy efficient technologies, many companies have only a minor presence or stay out all together due to concerns over intellectual property.

Pollution will continue to be a major drag on the Chinese economy for years to come. I am, however, optimistic that public desires, both domestically and internationally, for a higher quality of life will force government and industry to work toward better air quality. I only hope it comes soon.

China's Labor Shortages
For much of the past decade, China has been the world's manufacturer due in part to a large supply of very cheap labor. As the demand for Chinese labor has grown, however, the supply has not. In many of China's major manufacturing centers there are persistent labor shortages. According to the New York Times, "shortages at hundreds of Chinese factors have led experts to conclude that the economy is undergoing a profound change that will ripple through the global market for manufactured goods."

The shortages are attributed to government policies that encourage people to continue farming instead of moving to the cities, rapid expansion at many factories, a demographic shift due to the one child policy, and more young people receiving advanced educations (an engineering graduate doesn't want to assemble hair brushes on a factory floor.) Experts estimate that major export industries are looking for over 1 million additional workers.

As demand grows and supply remains flat or declines, the obvious happens - wages and benefits increase. Having visited many Chinese manufacturing sites, trust me when I say this is a very good thing. There are two outcomes of the growing wages. First, companies seeking to minimize costs will shift to other low-wage countries such as Vietnam. For those that stay, they are creating a larger middle class in China; a middle class that will buy goods produced domestically and internationally. Workers and their families can then pursue opportunities beyond simply providing unskilled labor to assemble your next pen, computer, or bunny-head slippers.

The labor shortages are causing companies to move inland, away from the major manufacturing centers in Guangdong and Chongqing. Some are even moving out of China completely. This challenge, should it continue, could help China transition from a low-cost labor supplier to a country with a professional, educated workforce and a consumer-driven economy. Keep your eyes open.

China As Economic Powerhouse?
Over the past few years there has been a lot of newsprint and political spin about the rise of the Chinese economy. By anyone's accounting, China's GDP has been growing rapidly and the standard of living, as measured by financial values, has increased markedly for urban residents in Eastern China. However, there are some clouds on the horizon...

China's explosive growth has been fueled in large part by access to cheap resources - labor, energy, capital, and materials. Eventually, the cost of those resources will climb and China will no longer be the low-cost leader. In the next series of posts, I plan to explore several challenges that could affect the future growth of the Chinese economy.

Carnival of Investing #17
Welcome to the 17th Carnival of Investing, direct from China. The Carnival presents an opportunity for bloggers to share their best recent posts on investing. If you’re interested in contributing a post to the next carnival, you can use the form at Blog Carnival or Conservative Cat.

Let me also welcome you to A Financial Revolution. The posts on this site discuss saving, investing, and spending wisely. Please check out the posts on Dividend Reinvestment Plans (DRIPs), going private transactions, and royalty trusts.

Due to limited Internet access in China, I was not able to read all the posts, so I have provided the description from the submitter. Next week's carnival will be hosted by Blueprint for Financial Prosperity. And now, on to the posts…

Luigi at Centrerion: Canadian Politics presents Allah EconomicsAn analysis of the outcome of the Islamic Capitalist experiment.

Jason at Investor Geeks presents a Book Review of Jim Cramer’s Real Money
A review of Jim Cramer's popular book Real Money. Jason declares it a good read for new and experienced investors

Jim at Blueprint for Financial Prosperity presents Trade With Your Head, Not Your Heart
Jeffrey at Personal Finance Advice presents Survivor Bias - What Investment Managed Funds Are Hiding
Survivor Bias" makes managed funds appear to have better returns than they actual have

Amanda at Young and Broke presents Places to Keep Your Money
After you've got your emergency funds, here are some options for starting out as a saver/investor (including bonds, index funds and stocks)

Kirk at the Investimist describes Rebalancing My Portfolio

Jose at Stocks for Me presents Coca Cola’s Director’s Pay
How Coca Cola Director's foiled the investors by making them believe they tied their compensation to company performance -- just after giving themselves a 40% raise.

LAMoneyGuy at It’s Just Money presents Is Investing Risky? What is Risk?
Many think of investing as risky, but what, exactly, is risk?

Tom at "D"igital Breakfast presents Sun Tzu and the Art of Buying or Making a Sandwich
Is it cheaper to brown bag your lunch versus buying it at work? Here are the results of a little bit of detective work.

Trapier of Hayek, MD presents The Role of Entrepreneurship in Society
The post explains how advanced financial systems and entrepreneurship in medicine are making us all richer, healthier, and, most importantly, freer.

FMF of Free Money Finance presents 15 Questions to Ask Discount BrokersComment on (and rant about) E*Trade.

Big Cajun Man of Canadian Financial Stuff presents the Best Financial Advice Ever Given
Sometimes you have to take your time, even in investing, and this "parable" espouses those thoughts.

2Retire At 50 presents How to Live from 50 to 59 ½
This is the investment plan 2R@50 laid out to try and retire at 50.

Dan at Searchlight Crusade presents Leverage - Making a Decent Investment Spectacular

ML at Investing the Middle Way presents An All ETF Asset Allocation Portfolio
This post reviews the performance of a diversified 8-ETF portfolio that returned 8% in the past 7 months.

Bill at Ask Uncle Bill presents You, Inc.
At this time of the year we are all looking to reduce taxes. Reduce your taxes and stick it the Man by starting your own company.

Fred at Fred Fry International presents Are Brokers Screwing Stockholders?
The mess that is Short Selling.

1mill_by_35 at The Net Worth Blog presents Big Discounts to Intrinsic Value Don't Always Mean Big Alpha

Loi at Investing Guide presents Signed up for CFA 10th Annual Career Development Expo.

Steve at My Personal Finance Blog presents I Bond interest rates won’t be as attractive in May
Many of us have invested in I Bonds because of the great 6.73% (or higher) rates which started in November 2005. The next interest rate update will likely not be so nice.

Mike at Mover Mike presents An Insurance Policy for Your Family
Usually investors buy gold when they're worried - about inflation, the value of the dollar, the stability of the markets, or geopolitical events.

Richard at Firevalt Blog - Personal finance and entrepreneurship presents Grassroots lending and borrowing

mbhunter at Mighty Bargain Hunter presents Melt value
Some examples of how to calculate this important value-indicating number.

Tom at Financial Options presents The Week Ahead: Your Financial Road Map for April 10-14, 2006
A roundup of scheduled economic and financial indicators, Treasury notices and auctions and select earnings reports for the coming week.

George at Fat Pitch Financials presents Magic Formula Ranking Using Portfolio123
Fat Pitch Financials uses Portfolio123 to recreate the Magic Formula stock ranking system.

Steven at The Japan Stock Blog presents Inside the Minds of Japanese Investors
A look at a survey of Japanese individual investors by Nomura Securities. Nomura's survey provides more evidence that those already holding positions in larger-cap Japanese equities are well-positioned.

Moneywise at The Real Returns presents Balanced/Hybrid Fund Performance
With the balanced fund performance, the whole is greater than the sum of its parts.

Abnormal Returns at Abnormal Returns presents Natural hedges
With the risk of higher oil prices this summer looming we discuss how a well-designed portfolio can provide a "natural hedge" against the higher costs of driving.

Enjoy and don’t forget to leave comments.

April 01, 2006
Another Free USB Drive
For those of you that weren't able to take advantage of the free USB drive from Microsoft, LPL Financial Services is offering a free USB drive that contains a study showing why they're the number one independent broker/dealer. All you have to do for the drive is call (1) 866-523-8218 and ask for a free copy of the "Moss Adams study" and other information on a free memory stick.

I haven't tried this one, but it might only be open to financial advisors or others in the field. Let us know if it works/doesn't work for you.

UPDATE: Paul left word that LPL will only send the USB drives to financial advisors. You are, however, welcome to request a (emailed) study. You might have better luck with the Microsoft USB drive.

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