China -They Are Racing Past US
I have just returned from an 8 day trip to several major cities in China which most of you never heard of, but which are far bigger than new York, and are the center of the action in the near term. Chongqing and Chengdu are 32 million and 12 million population. For real estate developers or investors these cities would be incomprehensible as they were to me. One example. Chongqing is bisected by two major rivers. They have 21 bridges now. Traffic and rail requires expansion of the bridge capacity so at the moment they are building eleven more. Yes eleven and they are each like the George Washington Bridge or Tappan Zee bridge. Wrap your brain around that. They did not wait for Governor Cuomo to decide this or that. They have a 5 year plan which requires the traffic to flow well so they just did it as part of the master plan for the metro area.
When you stand on a hill and look over the city-not easy through the dense smog- what you see is a forest of cranes erecting 20-40 story apartment and office buildings and hotels. Not one here and one there, but 40 story buildings one next to the other all over the place. There are more cranes at work in Chongqing than possibly on the whole east coast of the US. Even if I enclosed a picture you could not conceive what I am talking about. It is breathtaking. While some say it is a bubble in real estate in China, what they fail to understand is that those empty condos are all sold. In China land has been the store of wealth and the savings for hundreds of years. There is not a functional stock market for the average Chinese. There is no bond market nor commodities market for them to invest in. There is only real estate. So they buy condos.
I was there because I am setting up a partnership with a highly experienced Chinese American who built Goldman China many years ago from scratch and a local Chinese hotelier, and a boutique American hotel company. We are establishing a hotel branding and management company. We are not investing in hard assets. We are a fee only company. Unless you are a local Chinese you don’t want to invest hard dollars in hard assets in China, unless you like losing it all. We met with numerous developers and high government officials on the trip. They are all very interested in learning as much as they can about how Americans do things and conduct business. Despite anything to the contrary you may hear, the Chinese really like America and Americans and they could not have been friendlier and more professional with us. They flat out say we are way behind you but we want yo to teach us everything you can. I am absolutely convinced that much of the hacking is driven less for military reasons and vastly more because they believe the US has the best ways of doing whatever it is and they want to go form where we were in the sixties to where we are today in 5 years, and they will say so. In my view they will succeed and then run over us.
China is a driven society. The major cities have the most incredible architecture you ever saw. It is spectacular. The entitlement process does not exist. There is a five year plan or some other plan and if you have the right “relationship” with the right official they say to the developer, if you build a 300 room five star hotel on this site and open it in the 24 months I will have the province sell you the land at maybe 10% of real value, but you have to finance the construction yourself. The developer then gets a 20% -50% construction loan depending what the building is and if there is a brand to the hotel or the right office tenant. The rest is developer equity.
The Chinese are very smart, well educated, super ambitious, and driven to succeed. Yet to Americans they are as nice as anywhere I have traveled which is much of the world. They genuinely like us. It was entirely safe on the street, even when I wandered through tiny back alleys where no American has likely ever ventured. In those areas nobody even noticed me and almost no westerners go to these mid China cities. There are almost no cops on any streets and yet it is perfectly safe to walk around.
The roads are the best I have ever seen and every freeway and main road in the city is beautifully landscaped and manicured and maintained. The cars are all new. There are almost no bikes left in China. Everyone rides a motor scooter or a car. Everyone has an I phone or smart phone. The people are all healthy looking, walking with a determination and they all look they just had a shower- they are clean. While it is not clean on the streets due to the pollution, there is no litter anywhere, no gum stuck to the walk. I use the miniskirt as a indicator of where this society is. Many of the young women wear miniskirts to work and at night or very tight jeans. To me that says these young ladies feel free and self confident and not afraid to show off the latest American fashions they just bought. Compare that to women in the middle east or India and you have a simple indicator of Chinese society vs the other developing areas where the potential exists but they will never be China. And yes many of the girls are very pretty. In Chongqing many successful developers are women.
If you go to Shanghai or Beijing or some of the eastern coastal cities and think you have seen and know China- you have not seen it. It is like a tourist saying I saw New York, Beijing and Atlanta and so I saw America. Shanghai and especially Pudong is nothing to do with where we were in central China. Pudong is the most gorgeous new city you will ever see. The architecture is unbelievable. They took a huge farm land area and in seven years created the most modern city in the world. And it is sparkling clean. It is right across the river from the old Bund which is the European banking center of 100 years.
China is almost pure capitalist now, while the US is becoming socialist by comparison. There are few benefits packages for employees. There is no real social security or Medicare as we know it because the kids always cared for the older family members. The kids in China are now moving away and leaving the parents and grandparents adrift. China has a giant problem in a few years paying for hundreds of millions of essentially abandoned elderly. They don’t have pensions.
I could go on but I am limited to space. Here are some take aways. If you think you can go to China on your own and set up business relationships and be successful on your own you will get hosed. Corruption is part of the everyday culture. Contratcs are meaningless since there are not really functioning courts for commercial disputes. And anyway, you don’t have the judge in your pocket. Unless you can link with a Chinese partner who you can vet as reasonably honest, and so long as you do not invest in hard assets as an investment, you may do OK. We are purely fee driven in our venture and our partners on the ground are Chinese American living there for over 25 years and impeccable. Trust is not a word Chinese know. Guanxi is. That means relationships whether through extended or months of dinner and late night partying and certain other ways of building relationships. You do not just walk into China and think you can replicate this. You will get your clock cleaned. If you think you can just pay off the right people you really do not understand anything about how the Chinese do business. If you do not drink late into the nite and eat until you can’t eat anymore you will fail. This is a place that is so different and so thoroughly corrupt and dishonest that without the right local people on your team you will lose you money. They are not above just ripping up a contract and throwing you out.
In quick summary, China is going to surpass the US in 5 years and leave us in the dust. Obama is going 180 degrees the wrong way and is drowning us in debt and regulations. China is as pro business as anywhere in the world. They bend over backwards to help business. Obama wants to regulate and tax us if we succeed. The Chinese want to help their people succeed and become wealthier. It is a world turned upside down. China has absolutely no interest to ever attack the US or get into a war with us. They have never been imperialists in 3000 years and they know it would be stupid. They may get into a skirmish with Vietnam or even Japan but not a war that brings us in. They will simply beat us in business and run right over us while we drown ourselves in debt and regulation. The US had better wake up fast, and fix the fiscal mess, and become pro business, or we will be number two in five years.