The "Birds Nest" in Beijing now suggests that China now holds the key to worldwide dominance of the future.
It is our estimation that within twenty (20) years, China will be the largest, strongest and militarily the greatest single power of the 21st century. Its strength will emerge from its collective will, discipline, pragmatism and commitment to excellence, qualities that we in the west seem to have forgotten. We helplessly and haplessly have found ourselves on the outside looking in seemingly without any answers or recourse to the ever increasing problems that China's dominance will create.
So where do we go from here?Our organization has kept a close eye on the entrepreneurial spirit of China's one and a quarter billion people and the emerging markets created by this growth. We have closely monitored the progress of the various exchanges that have emerged and the pros and cons that accompany them. China' burgeoning attempt to create a free market exchange has been tumultuous at best, chaotic and indecisive at worst. However, after years of inconsistency, their commitment and pragmatism has resulted in the formation of the China Securities Regulatory Commission (CSRC) the equivalent of our own Securities and Exchange Commission, in order to eliminate the extreme highs and lows that had been the brief history of the Chinese markets. From our perspective, Chinas growth has been unequaled over the past twenty five years and all indications are that this will continue for a very long time. Its needs are immense, to include but not limited to agriculture, energy, computer science, health, infrastructure, auto, finance, media to name a few. As such, the new Microsoft's, Hewlet Packard's, Apple's are all waiting to be discovered and we will be at the forefront in finding them. While there are concerns in the volatility of these markets, we must focus on the on the long term opportunities, which will be vast. The unlimited number of emerging corporations, the purchasing power of one and a quarter billion people, their enormous appetite for consumer goods and services, the development of China's vast infrastructure, agriculture, commodities, imports, exports, energy needs. The possibilities are endless and limitless as the country itself. Capitalism is not something new to China. At different times throughout its history the Chinese people have expressed their entrepreneurial spirit in one form or another. During the last days of the Qing Dynasty (1644-1911) where the Chinese economy was in disarray, businessmen sought to obtain capital by issuing public shares of several companies in order to raise cash for their survival. In 1860, records indicate that a trading market was established to trade securities. Also in June 1866, thirteen companies appeared in a news paper under the "Shares and Stocks” section. In 1882, the first share trading company was established in Shanghai. In 1891, the Shanghai Share Broker's Association was founded by American and European businessmen, in an effort to accommodate foreign participation. In 1914, the Chinese government instituted regulations pertaining to the buying and selling of securities. Trading continued in many different forms, until the Communist takeover in 1949, when everything with any semblance of private ownership was obliterated, under the leadership of Mao Zedong and the Cultural Revolution. The Cultural Revolution, while in theory to the Maoists was the answer, the practical application proved to be a disaster to the Chinese populous. Its isolationist practices proved crippling, pushing China toward stagnation and poverty. Realizing its plight and its position on a global scale, China's pragmatism and entrepreneurial spirit reemerged in the early 1980's under the leadership of Deng Xiaoping. Shenzhen City became the prototype in China's transition to capitalism and is now home to one of three stock exchanges, Shanghai and Hong Kong being the others. Hong Kong itself officially became part of the Peoples Republic of China in 1977, when the United Kingdom transferred sovereignty to Beijing. Chinas rise to the top of the economic ladder has been meteoric. China can now lay claim to five of the world's biggest companies, measured by market capitalization. In the near future this list will continue to grow. China Mobile, the Industrial and Commercial Bank of China, China Life, Petro China and China Petroleum and Chemical, currently occupy the throne as the top five largest companies in the world. They have now surpassed the United States in the top ten rankings, pushing Exxon/Mobil, Microsoft and General Electric to the bottom of the list and AT&T out completely. The rise to the top however has had its share of turbulence. In 1991 the Shanghai index went from 100 to 250 points in less than a year. By April 1992 the market exceeded 1300 points, however by June the market fell below 400. By October the market surpassed 1500, and then fell again below 400 by June 1994. This volatility continued for the next eleven years, resulting in scandal, bankruptcies, and credibility issues, relating to the survival of the stock market of China. This reflected heavily on the Chinese government and the business community in general, creating serious doubts as to Chinas ability to maintain an international presence in the trading of securities. Finally, in 2005 the Chinese government realizing that their own stock market had not kept pace with the giant strides of their global business interests, stepped in with several major reforms, the most significant being a new requirement mandating companies with large shares held by the government, to compensate public share holders by issuing additional shares in the companies. This continues to be of primary focus within the government, in an effort to meet its stated goal of floating all non tradable shares. To further enhance its credibility and regulatory oversight, the CSRC maintains a tight rein on the markets. The Shanghai and Shenzhen stock exchanges market capitalization is now said to exceed US$600 Billion and growing rapidly. A word of caution however. The structure and temperament of China's stock markets is quite different from all other exchanges. The performance of these exchanges does not correlate or reflect on markets elsewhere. China's internal markets are virtually inaccessible to outsiders, and as a result will appear to be unpredictable by western standards. The "bubble” so to speak in Chinese stock prices usually does not take into consideration or make any distinction between inflated valuation on mainland exchanges and more realistic pricing outside Beijing, to the extent that significant movements in either direction will not necessarily affect the value of companies outside China. The reason being that shares cannot be arbitraged between Beijing and any outside markets. In addition, there is one fundamental aspect that differentiates the outside markets from those in China. All critically important companies are majority owned by the Chinese government, despite the perceived transition from Communism to Capitalism, which we can observe. It is our observation that this will continue for the foreseeable future. Due to the complexity of the Chinese markets it is vitally important to define and clarify their nature and structure, for the purposes of being able to clearly understand the scope and function of one's investments. The Chinese markets consists four distinct and unique stock exchanges. They are Shenzhen, Shanghai, Hong Kong and Taipei. The Shenzhen and Shanghai exchanges are operated by the Peoples Republic of China. The Hong Kong exchange due to the long standing influence of Great Britain operates similar to the London Stock Exchange. On the other hand the Taipei exchange is operated under Taiwanese rules which can be considered similar to but not identical the London and New York exchanges. Historically both Hong Kong and Taipei have maintained systems and regulations that are well established and consistent. On the other hand the Shenzhen and Shanghai markets have experienced severe volatility over the years which present a higher risk factor, due to financial disclosure, corporate leadership, intellectual property protection, issues relating to transparency in general.
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