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GP11September:  Hong Kong Shanghaied

Fear and Loathing in Hong Kong.  You have already read about rising unemployment there, homes that are now worth much less than the mortgages they bear, and migration of shipping revenues to neighboring provinces as well as to Singapore.  Hong Kong is more than participating in the grand Bear Market that has swept over the world.  Nowhere is this more evident than in the financial services sector, once Hong Kong’s pride and joy, which is now foundering.  The banks are paranoid to a fair-thee-well, with many loans under water and without a clear vision as to how the local economy will recover.  This paralysis has clearly even affected foreign banks with operations there.  Local bank managers even for the European banks are sitting on their hands and not getting loans made, passing up good opportunities and sound credits backed by a pile of assets.  If Hong Kong cannot make loans, if its core financial businesses are standing still, you can be sure the city’s woes will last much beyond the present crisis, hinting at an enduring long-term decline in its affairs

The Upbeat Boys from Shanghai.  Ironically, a few of the more limber Chinese banks based elsewhere are ready to do business.  In part this reflects the genuine business optimism still coursing through China even as the rest of the world wrestles with a slough of despond.  But the irony is deeper.  Quietly, banking in China is awakening, even if the principal banks appear to be teetering on the edge of bankruptcy, burdened by horrible loans to state owned companies that have no prospect of being repaid.  So if you are a smart entrepreneur in Hong Kong who cannot get local financing, you are now welcoming smaller, nimbler Chinese banks in to finance your trade receivables.

Certain Chinese banks are learning from the foreign banks now invading their turf and then racing to do new kinds of business.  An interesting article in the Wall Street Journal, (August 27, 2002, pp. C3 & C13), entitled “Foreign Influx Could Benefit Chinese Banks,” captures just this point.  It talks about how Citibank and other foreign banks  bought up accounts receivables from Ericsson’s Chinese operations, wresting banking relationships away from the Chinese.  The foreign banks have provided a wake-up call, and local bankers are heeding the message:  Learn how the foreigners do it and get even more aggressive than the invaders.  “Far from crumbling, Chinese banks are proving quick studies in learning firm their foreign counterparts.  That suggests China’s banking sector may follow a pattern similar to” other business sectors.  “First, foreigners enter the market by storm, then Chinese companies fight back and retake lost ground.”  This is fascinating because several foreign observers predict bad times ahead for China based on the fact that the principal banks are underwater.  Is it possible, we may ask, that as whole new flock of free enterprise banks may supplant the old dinosaurs?

Liquidity at All Costs.  Lest we forget, the tendency of the Hong Kong banks to get some cash in their jeans and to hold onto it is mirrored by companies aplenty in Europe and America.  As we said in our Annual Report on Annual Reports 2002, the signal thrust of principal companies last year was to gather cash, not to raise revenues or profits.  In general they were not seizing opportunity but avoiding risk.  Of course, this is the time when banks should be nailing new, good customers and companies should be buying up new businesses on the cheap.  But that’s not what most people do in a storm. 

Doing Nothing or Something.  We have spoken with several investment managers around the United States who are doing a bit better than their peers by doing nothing.  They are under-invested, sitting on cash, so they have avoided stocks in decline.  That sort of describes what you do in this business climate at the moment.  Either you sit on your cash and wait for that ever receding bottom in world markets, or you look for niches you can buy into cheaply with a view towards establishing a major long-term market position.  If you are a Shanghai bank, right now you can position yourself cleverly throughout Hong Kong, Southeast Asia, and other ports of call.  If you an investment manager in Boston who has to dress up your results for the next 8 quarters, you probably have to sit tight.  If you are a private company or private investor, you are buying all sorts of things at bargain prices.  Or, if you are Warren Buffett, you are participating in a joint venture to buy very cheap telecommunication assets that are under water now.

Pushing the Boundaries.  But the strategic insight here that will have meaning when this nine year Bear Market comes to an end is not that some bankers and investors are sitting on the sidelines.  What’s happening is that enterprise everywhere is becoming global in ways that we could never have imagined.  Even capital-hungry China is beginning to deploy capital further and further afield, first perhaps in Hong Kong and then all about its region.  Western multinationals will probably be investing and operating in Third World countries they have typically shunned in order to create new markets.  The September 2002 Harvard Business Review (pp. 48-57) in “Serving the World’s Poor, Profitably” suggests that there’s a nickel to be made among the 65% of the world’s population that earns less than $2,000 a year.  Hindustan Lever (Unilever’s operation in India) does $2.6 billion in India, making a living by keeping its aggregate capital investment low and using some unusual tactics to reach poor villagers.  Business, in fact, will be driven more and more to reach new frontiers, where angels fear to tread and the complacent never venture. 

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