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We just returned from a nine day trip to China. Having spent a few days in
Shanghai, a day in Guangzhou and the rest of time in places
less traveled, including two silver projects, we
had some ideas that we’d like to share. Normally we stick to silver in
our writing, but this time we felt compelled to stray if just a little bit. Then
again, as you will read below, silver is such a unique metal, such an
integral part of our lives that in any type of development in modern society
will have a “silver angle”.
Hardly anyone will dispute that China is a development story. Even
though it was before our time, we get a sense that present day China is
somewhat like what the US was a hundred years ago – zooming. That is
old news you’ll say and be absolutely right. However, we’d like
to point to some observations that dampen our enthusiasm about China’s
prospects. We are not here to bash China, downplay its achievements
or question its strategy. On the other hand, everyone we’d spoken to in
the last several years, who had been to China, helped to set our expectations
so high that we felt the reality didn’t quite live up to them. Whether
it was our expectations that were the problem or in fact the Chinese miracle
has been overstated (we’re good at that), you decide.
Yes, Shanghai
is a metropolis. The number of high rise buildings in Shanghai
is probably several times that of New
York’s. From the top of the (TV/tourist)
tower in downtown Shanghai
you get a magnificent view of the city – skyscrapers in any direction
as far as eye can see. We got pictures
to prove it. The sheer size of it is absolutely staggering.
Then we learn how they are built. Now, we are not claiming that this is a
complete story, yet we got it from people who have no reason to tilt the
truth in either direction. Apparently, a great many of those high rise
buildings are empty and were built just to be built. The story goes that
government (banks) provides loans to construction companies to build them. Contractors
get the money up-front and have an incentive to “save” as much
money as possible on construction costs. That leads to use of cheaper
“sub-standard” materials. Builders have no interest in the future
of these buildings and could care less how they will be used, if at all. Vacancy
rates in these buildings are said to be high which earned them a local
nickname of “see-through” buildings.
By the way, use of “sub-standard”
materials is not limited to Chinese builders. A fellow traveler
from Arizona
shared this story. From his words there is a cement plant in Arizona that produces
high quality product which in its entirety is shipped to – where else?
– China.
At the same time, for domestic construction in the same area, where that
plant is located, cement is imported from Mexico. Again, we are not
claiming that it’s accurate, just passing on the tale.
Back to China. Those who have been to Shanghai know that Kuangpu River, which cuts through the city, is
a busy transport way. Very busy indeed. Ships and boats of all shapes and
sizes are rushing back and forth seemingly non-stop. We saw it first hand
because we asked for a river-view room at the Shangri La Hotel. We also ferried
across the river a couple of times to visit the Bund and the Nanjing Road
attractions and got a pretty good look at it.
All the while we had a strong feeling that no fish is present in the river
and in the off chance there is some, doomed would be the creature to eat it. Countless
shops and restaurants on the old-town side of the river emit such a heavy
stench, that it even beats the unbridled exhaust smoke coming from the river
boats on one side and scores of autos crowding the freeway on the other. We
would be willing to bet a couple of grand that those shops and eateries dump
all they can into the river, as their counterparts on the inner streets of
Shanghai and universally in other places we have visited dump right on the
side-walk.
This story comes from a friend who lives in China
for four years now. He knows a factory that has a manufacturing unit.
Apparently this unit is subject to environmental regulations and
recycling/clean up process before it can discard its waste. Such a facility
has been built and is present on site, but it’s only turned on when
there is some sort of a check or audit comes around. The rest of time the
recycling unit just sits there rusting.
Population is another problem, of course. If
strength is in numbers, in our view, so is weakness. One and half billion Chinese
throw off mountains of garbage that is not disposed of duly. Yet the real
problem with the population is the ratio of men to women. While
government’s one-child policy did help slow down the population growth
it also lead to a distorted ratio between young
Chinese men and women. Apparently, since they were allowed to have only one
child many Chinese families used every trick in the book to have a baby boy
rather than a girl. That is because traditionally a son would stay with his
parents and take care of them when they get old while a daughter would marry
and go on to live in her husband’s family. Well, the damage is done and
the trend is still in motion. We don’t know how this issue will
manifest itself, but we’re fairly certain it will surface within
several years.
There are many more small things that we can’t
even recount. For instance, this is a true story told us by an Australian
investor whom we met in Shanghai.
An Australian entrepreneur built a shoe manufacturing line in on of southern China cities.
He hired local management to run the place. Within a few months he found out
that his Chinese management built an exact replica of the shoe factory at the
other end of the town: same equipment, same material, same
process. Only labels were different. We believe the story because of the
source it came from. But also because we saw many such knock-off brands in a
big department store where we went to pick up some necessities after our
luggage was lost by Air China
in transit and we had to get by for four days until we got it.
When all is said and done, China is a story that is
happening and this opinion or any other will not change a thing. Yet, with
all its great achievements and progress, China should, does
and will have its share of problems. To be clear, we are not bearish on China. But as
investors we have to be realistic and as such we don’t share the
super-bullish sentiment on China
broadcasted from every venue. The way we see it, best places to invest in China,
aside from natural resources and energy are healthcare and waste management.
Lastly, silver. Many of Shanghai’s high rises use their outer
surface as advertising boards. They use multi-color
lights to string together any brand name, logo or product you can imagine. To
that end neon and increasingly other, more advanced forms of electronic ads
are everywhere, especially in larger cities. While we have not done much
research on the subject yet, we are willing to go out on a limb and speculate
that all that booming construction requires a great deal of silver. Every so
often you hear the pundits say that all-time highs in base metal prices will
lead to their increased production and since the majority of silver is mined
as by product of base metals (and gold) they go on to forecast an impending glut
in silver supply. Well, let me just ask you this. If the world can’t
get enough of copper, lead, zinc, moly, nickel,
etc., what are these metals being used for? Are we casting giant 80 feet statues (the
likes of which we saw carved of stone in Henan) from these metals or are we (the
people) using them in construction and industry? And if so, how would it be
possible for the Chinese to build 17 cities the size of Chicago every year without using a
commensurate amount of silver or more? And that’s just China, what
about the rest of the developing world? Did we suddenly switch to a
“silver-less” society, cause if so, I
must have missed the memo and until I see it I ought to assume that
developing world is using silver in ever-greater quantities. They need it, and it is
still very affordable.
By : Sean
Rakhimov
Editor, www.silverstrategies.com/
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