The Great Mall of China

January 1, 2003

Dear Investor:

While all nearsighted eyes are focused on Iraq, North Korea and terrorism, there is a story that grinds along in relative obscurity. While the world must be forgiven for its myopia in the wake of the worst bear market since the Great Depression, clever investors must look ahead, much farther down the road–to China, the great emerging story of the 21st Century.

Over time (and it may well be a long time) Iraq, North Korea and terrorism will cease to exist in their current forms, either through outward force or inward implosion. Just as Fascism and Communism were largely defeated, so will be defeated the vestigial barbarisms that torment the world today. It’s just a matter of time. History’s story is one of progress. One hundred years ago, the average lifespan was 47, crossword puzzles hadn’t yet been invented and only 14% of American households had a bathtub. Needless to say, if you were born before 1956, or like your Sunday puzzle while soaking in the tub, you’ll be the first to agree that the world has gotten better.

Much of future progress will center around China. And it is progress that every long-term investor must focus on, because it is precisely in atmospheres of gloom and doom, when the world is misdirected, as if by the keen diversion of a dexterous magician, that the next story for prosperity emerges. Investors tend to exchange their distance glasses for reading glasses at exactly the wrong time. During the great bull run, everyone could see far ahead, to exponential growth and limitless wealth. Unfortunately, the traffic accident was only feet away, invisible to those focused on the horizon. Now, just as the horizon holds real promise, people have taken to driving with their chins on the steering wheel. Perhaps, they need bifocals, or maybe quick laser surgery. In any case, please listen to the optimistic case for this millennium.

China’s recent entry into the WTO has catalyzed its remarkable conversion to a capitalist, market economy. China is fast supplanting Japan as the economic power of Asia. Moody’s recently raised its outlook on the sovereign debt rating, reflecting greater confidence in the currency and capital flows. Of course, the export prowess of China is legendary. Enter your local Target and try to find something not made in China. But the most striking aspect of this success story is the burgeoning class of well-heeled consumers that is making China a major importer, not just an exporter. The great mall of China is open not just for buyers but also for sellers. According to the Wall Street Journal, Shanghai ports will handle a record $40 billion in imports for 2002. China is now the world’s 4th largest economy if you count the European Union as one entity. It has 1.3 billion people and many of them are developing an insatiable taste for imported goods—everything from South Korean computer chips to American cars to black Malaysian roses. The Journal reports that China has surpassed the US as the top global importer of steel, an amazing commentary on Chinese consumption.

The question is how, as an investor, to share in this mammoth growth. Buying Chinese companies is far too risky due to the poorly regulated and illiquid mainland market. Superior opportunities are to be found in purchasing shares of Hong Kong and Asian based companies that do the bulk of their business in China, such as China Mobile, the largest telecom operator in the world. The Liberty Newport Tiger Fund pursues this strategy. But the other way to participate in this future century of profound Chinese economic progress is to buy shares of large-cap US exporters with global scale. Citigroup recently purchased a significant stake in Pudong Bank, one China’s largest lenders. AIG, which oddly, was originally founded in China, is the most prominent global insurer in China with a massive network of local sales representatives. PepsiCo, Microsoft and GE all have extensive tentacles in China, and so on. Our large-cap mutual funds own these companies, along with many others that can capitalize on such opportunities.

Of course, there are substantial political risks in China, but the unfolding legacy of Jiang Zemin and Zhu Rongji looks to be a bright one. In a recent well-attended speech, GE’s chairman Jeff Immelt said that every company will have to learn to buy or sell from China, and preferably both. He could have added that every investor will have to do the same.

A few feet away are the all too substantial tragedies that form the world’s current problems. Those who invest for the future would be better served by retrieving their distance glasses. And looking not to the Middle East, but to the Middle Kingdom.