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China's New Investment Rules. Second Tier Is First Rate And The Service Sector Shall Reign.

By Dan Harris and Steve Dickinson

Paul Denlinger over at China Vortex has a good post up on where to invest in China going forward. The post is entitled, "The New Investment Rules For China," and it sets out the following seven rules for China investing: 1. "Avoid Shanghai and Beijing." They both have plenty of smart people, but staff turnover and costs are just too high. 2. Look at the "20 major city markets in China" like "Dalian, Hangzhou, Ningbo, Xiamen, Guangzhou, Wuhan, Nanchang, Chongqing, Chengdu, Fuzhou, Kunming, Nanning, Nanjing, etc." And Qingdao. 3. Because Guangdong and Zhejiang are the two largest manufacturing provinces in China, these they "are going to be hit hard because of their dependency on the US market." 4. If you are a private equity or hedge fund investor, you need to think about investment horizons. If you can offer investments which create jobs and upgrade the skill force, you are in a good position. 5. "China?s hardware development and infrastructure are very impressive and are the most modern in the world, as the Beijing Olympics showed. The hardest part to modernize is peoples? mentality as the tainted milk scandal has shown. China?s aging demographics do not give it enough time to cross the chasm, so Chinese will get old before they get modern. When that happens, China will look like a bigger version of Japan, and will have all the problems Japan has today. Just hope that China has a national healthcare system in place by then" 6. The wealth gap will become wider over the next 10 years between the cities and the countryside, then stabilize for five years, then shrink as the city worker bees retire in 15 years. 7. The dumb money has already been made in China. It?s time to rebalance your portfolio to make smart money. I agree with all except numbers 5 and 6, which are, like all long term predictions based on the assumption there will be no big changes. The key business point to take from Paul's post is that it is too late for companies to make easy money by just going blindly into Shenzhen or Beijing. They should consider second tier cities and they should consider demographics. Paul is right to tout China's hardware (infrastructure) and bemoan its software (service sector), but I see this as THE opportunity for Western companies. China's service sector is growing and it is in precisely that sector where the Chinese are looking for help and where Western companies are so well equipped to give it. And it is indeed the second tier cities that are, as of now, relatively undeserved. In its post, "Franchising and Education Market -- Lucrative Business in Asia," Trendsniff contends that "education, healthcare and retail" seem relatively immune from the economic slowdown in Asia. Though I have to believe almost nothing is completely immune from a major economic slowdown, I do see the service sector in China continuing to thrive, particularly for foreign companies. The number of Chinese with sufficient disposable incomes to contract out for services is rising and these are the exact people who both understand the benefits of paying for name brand services and can afford to do so.

Full post as published by China Law Blog on October 05, 2008 (boomark / email).