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By Dwdonhoff
May 29, 2007

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FIRST OFF... I'd been quite cognizantly aware of the banks since I arrived on Thursday... they are EVERYWHERE... and to my visibility their lobbies looked busy, similar as any U.S. banks, but I didn't see anything approaching mayhem or coiling queues. Yesterday we visited a nearby Bank of China to change out some dollars to Yuan, and we were one of just three customers during our 7-8 minute visit... nothing too crazy other than the 3 year old who dumped her Kool-Aid on the leather lobby couch...

An interesting note that the bank rent-a-cops are only allowed batons... no pistols on their belts at all. The ONLY fire-arms I've observed have been on the guards along the streets of Embassy Row. MOST interesting is that the heaviest defended embassy is Japan's, from Chinese attacks. Apparently the recent honorings by the Japanese PM toward WW2 veterans (who are seen as bloodthirsty monsters who brutalized Chinese) raised more than mere hackles here.

I've yet to get a first-hand account of the banking system here, though if able I do plan to. At the very outside perspective... all looks very orderly. It is true that the Chinese systems make ours from the '30's look like a Ferrari... but the underlying economy is FAR from standing atop an inflated house of cards.

I *HAVE* spoken with a local marketmaker who's left the floor to take a position at a factory outside Shanghai to take them public. She fully expects that after their IPO she'll be set for life... and although we've all heard that before, I'm leaning toward believing her in this case.

Of course, I've been pestering (with and through my translators) about mortgage banking, terms, credit, and the real estate markets.

REAL ESTATE IS BOOMING.... I've asked around and the question of selling your real estate for the stock game get's me looked at like I have a third eyeball. YES, people here are excited about stock investments... they are excited about ALL investments (c'mon... they are Chinese after all, people!!!) but Real Estate ownership has taken very deep root in their ancient Capitalistic souls.


I've asked what they think Chairman Mao would say about private real estate ownership, trading, and the development of wealth. While they would NEVER disparage the good Chairman (ESPECIALLY to a damned blue-eyed devil from America) the most diplomatic response I've heard was that "Mao was an advocate for the people... and he would smile to see how well his people are doing in the new world of free commerce."

From a suburb called "The New Technology Developming District" (seriously... I'll post pics of the street signs later) I am sniffing all about real estate.

Century 21 is getting a foothold here... but the biggest brokerage I've seen so far with offices everywhere is Golden Key (www.ZDHouse.com)

Mortgages are basically "one size fits all" with variable terms tied to U.S. Prime, amortized 20 years. ALL banks are required to charge the same rate regardless (currently starting 1st year at 6%, then a margin above Prime.) The only credit analysis is your resume, schooling, and quality of employment. They have debit cards here, but no unsecured revolving credit, and no credit reporting from the three major bureaus yet. Analysis merely determines LTV allowed (or how much down payment you must provide.)

Taxes are a wild card... still in flux, as the gov't is still sorting out what they want to enburden and actions they want to reduce, and what they can get away with. Real estate ownership is still extremely new here... but the "newly landed gentry" are quickly feeling their oats & getting a grip on the power they can have over their governing officials. "The People" are getting a feel for pride of ownership, and there is the underlying seed of disdain for those who would restrict any ownership rights.

Currently there are ZERO capgains taxes... short nor long. There is (was) a 5% buying sales tax on the gov't original value assessment (4,000 Yuan per square meter. Yuan are currently 7.5 to $, do the math.) Originally the buyside tax was deferred 2 years, then forgiven if you had not resold (to dissuade flippers.) The deferral/forgivement period has been amended to 5 years now. My friend bought in 2004 in one of the nicest condo developments at 4k Yuan per meter2, and its now worth 8500/m2 (about $104/ft2.) He has no intention of flipping... he's seeking ways to get more.

The underlying employment markets are BOOMING. Within a 2 minute walk of the balcony where I am typing there are huge office complexes for each of GE, BMW, KIA, and Coca Cola. In downtown Beijing you'll find huge popularity for Amway (yes... AMWAY!) and Avon and Mary Kay. People actually LOVE these companies and their whiteboard circles here. There are KFCs, McDonalds, Starbucks and Pizza Huts all over the place.

There is MASSIVE internal AND EXTERNAL investment... money flowing in from all corners of the globe. Driving through Beijing leaves me wondering how there could possibly be so many sky-cranes for construction ANYWHERE... let alone leaving enough for the rest of the world. The sky is simply THICK in cranes building everywhere. Beijing is in a mad dash to pretty-up for next year's Olympics, to be sure... but the locals have no patience for the erasing of the old communist-era tenements that were standard here for so long.

These are a people of a culture who have ALWAYS been opportunistic and valued strength and wealth. The competitive zeal here cannot be sufficiently defined, explained, nor over-estimated. There is an underlying cultural strength that is wise to align with... NOT to fight nor fear. China is not jealously chasing wealth. There is a much stronger resolve here... China is desperately battling to ESCAPE AN ENTRAPPED MEDIOCRITY. And to the proud Chinese soul, mediocrity may as well be hell on earth.


INVESTMENT OPPORTUNITIES
(As I see them so far...)

Leisure Industries;
The Chinese are JUST BEGINNING to discover and embrace what is like not to live in a depression-style economy... and they are really beginning to like it!

> Golf & Tennis clubs... look for both equipment providers, builders, and operators! There are now over 30 such clubs in the Beijing area, and offhand remarks are that they could quadruple or more.

> Ski & Snowboard resorts. There are 6 (!) new such resorts in the mountains outside Beijing. They don't quite get enough natural snow (yet... who knows with global weather shifts,) but there is a frenzy spoken of among the kids (and it summer now... 90 degrees... but they're talking 'rad snowboarding' (which sounds funny getting interspersed in Mandarin!!!)) Look for equipment providers, builders, operators.

> Gaming/Gambling. Nothing here in Beijing (but the daytrading,) but look to the island developments. Gaming is DEEP in the Chinese psyche. We all know from the proliferation of stateside casinos what kind of business that can be.

> Travel industries. The pent-up local Chinese are just beginning to get their traveling jones going. Imagine the newly mobile postwar U.S.... but without a war to have depressed them! Singapore Air announced yesterday they are making a play to acquire 25% of one of the Chinese carriers.

> Home Improvement Industries... HUGE! The Chinese want to be a first-world living experience... need I say more?

> Lifestyle Industries.
Salons, Gyms, Weightloss/Nutrition.

> Vanity Industries.
Hair replacement, breast enhancement (just saw an infomercial for pushup bras & corsets,) liposuction, Viagra... The Chinese Confucius culture has long restrained sensuality... that's breaking loose quickly. (DJ Rock... BIGTIME opportunity for your businesses here!!!)

> Petcare industry. Dogs... especially BIG dogs (Labs, Dobies, Boxers, etc.) are gaining huge popularity in the 'burbs. Cats (as always) are an inner city fave.

I'll check in later gang... hope all are well! I've gotta go... have an appointment for a hosted dinner at a fish-head soup restaurant (uhhh... I think I'll just have the noodles, cie cie!)

Cheers,
Dave Donhoff
Global Equity Guy


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