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An Investor's Guide to China: Brief History

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June 24, 2009 – Comments (2)

Yesterday, as we try to get everybody excited about the upcoming Global Gains research trip to China, I provided a brief introduction on China’s geography and how that affects the country’s economy and our investment ideas. If you’re interested in that post, you can find it here.

Today, I’m going to focus on a very brief overview of China’s history and how that’s affected the country’s modern economic development. But before I get to that, I’d just like to remind anyone who is interested that you can sign up to receive all of our real-time dispatches from China in July for free simply by clicking on this link and providing your email address on the page. Please also forward the link to anyone you know who might interested in learning more about or investing in China.

We make these dispatches free to everyone on Fool.com because I feel pretty strongly that more Americans should be educated about China (it is a rising power, after all) and because intelligent American investors in carefully-chosen Chinese stocks should do pretty well over the next 10 years. In fact, during each of our last two trips to China we’ve uncovered a previously small and unknown company that has more than double since we wrote about it. Given what the market has done over that same period of time, we’re pretty proud of that fact.

But onto today’s brief overview of China’s history.

When I say “brief,” I mean brief
I’m not sure how well this slide will show up on the blog, but I apologize in advance for any strain it puts on the eyes. Bear with me though. You can’t use 48 point font when you’re trying to fit thousands of years of Chinese history on one slide:

Takeaways
The first takeaway is that China has a very long history that predates by a long shot the Terra Cotta Army, but that’s my starting point here because 1) I had a photo of it and 2) The army was built for the emperor who first unified China as we know it. So let’s call that the beginning of China as we know it.

The second takeaway is that China has a proud history. The inventions of paper, gunpowder, printing, and the compass are some things that the Chinese people are most proud of -- and if you watched the opening ceremony of the Olympics in Beijing, you saw all four depicted at various times. The reason these are part of the history is that they continue to affect China and its relationships with the world today. China was once not an “emerging” country, but a very advanced country. Thus, the Chinese people and government continue to try to achieve respect from the outside world. If you remember that as a motivating factor, it helps explain many Chinese development policies such as the focuses on infrastructure and technology.

Fast-forward a thousand years and you have the colonial presence in China, which gave rise to many problems associated with the opium trade and generally speaking retarded China’s development. That sort of concluded with the Boxer Rebellion and then with the overthrow of dynastic rule by Sun Yat Sen in 1912. The takeaway here is that China, like Latin America, had a lasting run-in with European colonists. This explains some of their skepticism of the west today and also our belief at Global Gains -- and one that we share with other academics and investors alike -- that the companies that will profit most from China’s development are not multinationals, but domestic Chinese firms.

But despite its long history, China is an emerging economy today and that’s largely the result of the political turmoil that followed 1912 and that culminated with the Mao Zedong-led Communists winning the Chinese civil war. Mao’s Cultural Revolution and Great Leap Forward are now generally regarded as a dark period for China that undid centuries of development. 500,000 Chinese are thought to have died during violent “purges” of spies and others hostile to communism, and development ceased as businesspeople and academics were forced to go work in fields and steel mills in the name of “equality.” This period of history is probably the reason why China remains a “emerging” economy today.

But Mao died in 1976 and Deng Xiaoping -- someone who had been purged multiple times by Mao -- took over and started liberalizing both the economy and the politics. This period from 1978 to 1989 was characterized by strong rural entrepreneurship and in it you can find the origins of modern China. That period came to an end in 1989 with the Tiananmen Square incident. Jiang Zemin (who was from Shanghai) took over after that and severely cracked down on political freedoms while further opening up the opportunities for the Chinese to get wealthy, hoping they would direct their previous political energies into the econonmy. Zemin also oversaw a focus on stimulating urban China likely because he was from Shanghai and because the foment that led to Tiananmen was largely born out of the cities. This led to the massive development along the eastern seaboard (something we talked about yesterday) and the modern infrastructure in Shanghai and Beijing.

And China’s had a pretty good past 25 years being the world’s fastest-growing economy, highlighted by the return on Hong Kong in 1997 and the return of Macau in 1999.

Today, of course, we have this blog post, which symbolizes the increased interest that the entire stock market has taken in the Chinese story. The takeaway from this modern history is that China is indeed a liberalizing economy that should continue opening up the world, making it more and more promising for western investment. That said, the last 15 years has been dominated by urban China and we’re seeing a reversal of that today as rural citizens are now more likely to be critical of the government. Thus, the government is now directed more and more resources into rural China, which is why we’re spending so much time there on our trip this year and why we think it’s the most promising niche in China for your investment dollars.

Summing up
There’s obviously much more to know about China’s long history, but this is a basic primer that I hope you find helpful as you read our trip dispatches (remember to sign up with your email address by clicking here) and look for your own investment ideas in China.

Comments? Questions? Please write them below.

2 Comments – Post Your Own

#1) On June 24, 2009 at 11:02 AM, rofgile (99.33) wrote:

I think you failed to touch on some of the more relevant aspects of Chinese history and trading.

For example - the Britain had a huge tea trade with China that led to the opium wars, which led to Britain owning Hong Kong and forcing opium into the country.  

Why was Britain trying to force opium into China?  Because China and Britain had a trade inbalance, much like the US and China today.  China would only accept silver in exchange for the tea, which led to Britain quickly depleting its silver.  Britain setup an evil operation of growing opium in india, and shipping that into China to addict a huge proportion of the population (I think it was like 60% of the population was using opium).  This balanced out the trade equation and made Britain rich, when China tried to protect its people from this exploitative global trade - Britain pushed their cause by military force.  Nasty part of history.

What to get from this?  In global trade with China, China sets up trade inbalances by preventing foreign companies from selling in, while having robust exports.  This is what is happening with the US now.  What it will lead to is most likely some conflict in the future.

 

I think some good questions from this blog and the past one are: what kind of trade and materials does China need?  Which countries can provide these (most likely Australia, Peru)..?  Why does it need this items? 

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#2) On June 24, 2009 at 11:22 AM, TMFMmbop (63.45) wrote:

A very insightful point that, you're right, I glossed over, but I'll fall back on my claim that I think I did a pretty good job of fitting a lot of Chinese history on just one slide.

China today is acquiring natural resources, as you point out. One region you left out is Africa. Not today's $7b acquisition by Sinopec of Addax -- a driller in North Africa, Iraq, and elsewhere.

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