Interesting China article from today

This article from Marketwatch touches on some of the distortions in economic data coming out of China's economy. Clearly the Chinese economy is growing and growing at much faster rates than the US, but it is hard to know exactly how rapidly. Some people do not trust official data at all and think they can get a better view of China's GDP growth rates by plotting the change in electricity usage instead of GDP (electricity growth has historically correlated very strongly with GDP growth).

Twin views of China's economic growth don't quite add up

HONG KONG (MarketWatch) -- China's gross domestic product as reported by the nation's 31 provinces and municipalities for the first-half came out significantly higher than the national figure reported by the central government, state media said.

The chasm between the two sets of numbers underscores the tendency of regional officials to file data that paint an overly rosy picture of the pace of growth.

The gap between the national and local figures ballooned to 1.4 trillion yuan ($205 billion) for the six months through June, according to the China Daily, which cited figures reported by the Beijing Times.

The size of the economy in the first half, according to figures provided by local governments, totaled 15.38 trillion yuan, while the National Bureau of Statistics reported a figure of 13.99 trillion yuan.

Mainland Chinese media reports said the discrepancy may be related to the tendency of local governments to double count the economic value of subsidiaries of large companies.

The error, according to reports citing Ye Qing, a professor with Zhongnan University of Economics and Law and a deputy chief of the Hubei Bureau of Statistics, arises when local governments count income from company branches along with the income figures reported by company headquarters. Often these company headquarters' figures already incorporate branch-level income.

Another explanation put forward is that regional government officials deliberately inflate the figures to exaggerate achievement in economic development. Often, officials' performance appraisals are related to how well the economy is doing.

Economists say the two sets of figures have failed to add up for the past five or six years.

Ma Jiantang, head of the Statistics Bureau, was cited in Chinese media reports last month as saying his agency was aware of the discrepancy and had proposed the central government directly calculate provincial GDP instead of relying on figures provided by regional officials.

Economists who monitor China generally disregard the regionally reported GDP figures and look instead at local export and import data, power generation data and other quantifiable statistics when trying to gain insight into the nation's regional economies, Credit Suisse's Dong Tao was cited as saying Tuesday in a South China Morning Post report.

Dubai collapse - revisited

While as I wrote a couple of weeks ago, almost all of Dubai's construction remains stopped, Dubai has made some progress at tackling its massive debtload.

Yesterday, Abu Dhabi announced it would provide $10 billion to its sister emirate to help it make some of the $15 billion in interest and principal payments that comes due for Dubai in 2009. Neither side has announced what if anything Dubai has offered Abu Dhabi in exchange for this, but at the very least, Dubai will have to tame some of the social liberties and urban excesses that have emerged over the past few years.

While this bond offering will help provide some short term cash and reduces the chance of a bankruptcy, Dubai is by no means in the clear. The cost of insuring Dubai's debt has surged over the past few weeks, and most estimates I have seen showed the cost of insuring Dubai's debt to have reached nearly 10% over the weekend. That was the world's highest rate.

The stock market, which declined 72% in 2008, rallied nearly 8% today. The cost of debt insurance declined to ~7.5% today on the news.

We'll see what happens next...

Brazil

I have spent a fair amount of time in Brazil but have yet to write about it so I decided it was time to post some impressions.

I spent a couple months living in Sao Paulo in 2002. I traveled around the country some at that time, and then traveled around again in 2007 – I spent a total of a few weeks in Rio de Janeiro, a few days in Iguacu Falls (at the border of Argentina, Paraguay and Brazil) and another week in the Northeast, primarily in a chilled out beach town called Jericoacoara. I also spent another week of work in Sao Paulo in December 2008.

Overall, I am a big fan of Brazil.

It has a very unique, fun vibe. It feels quite different to me than the rest of South America – the Spanish speaking portions of the continent have much more in common with each other than Brazil for sure.

The culture of Rio is amazing. The beach culture was fun and the festive atmosphere was contagious. The physical beauty of Rio is spectacular as well. Rio is a dense city intertwined with crazy mountains, rock formations in the ocean, and stunning white sands beaches. The views from the top of the Sugarloaf Mountain just off the shore (Pao de Acucar) and the Christo statue overlooking downtown are amazing.

I loved the juice shops on every corner (crushing lots of crazy fruits I had never even heard of into amazing juices). The ubiquitous cheesy bread (Pao de Queijo) is amazing. The coffee is world’s better (and stronger) than American coffee. I’ve also had a ton of fantastic (and fun) meals at churrascarias where the meat is served on swords by waiters who season and serve their own cuts of beef (quite similar to the Fogo de Chao chain here in the US).

Soccer in Brazil is worth an entire post in itself, but suffice it to say that seeing a game at Maracana stadium in Rio (which holds 100,000+ screaming dancing firework shooting fans) is an experience in itself. While I went to two relatively unimportant games, both had more than 50,000 people I’d guess, and the fans of each team were separated from each other by big fences and from the field by a huge moat surrounding the playing area.

The few off-the-beaten-path places that I have visited have also been great. Jericoacoara is as remote feeling of a place as I have ever been. You access the town by taking a 4x4 until the highway ends, then drive literally along the beach for an hour until you reach the little town. From there, you can walk the sandy “streets” from restaurant to bar to surf shop or explore the surrounding area by dune buggy. (Locals are happy to ferry you and your dune buggy across various little streams and rivers). There are also great dunes for hiking up, hanging out on, and sand boarding down. Amazing.

Iguacu Falls can also be very cool. I went during a good rainy season and it was fantastic. The falls are set right in the middle of the jungle and have these rickety metal catwalks that you can climb on right over these massive crashing falls. You would never be allowed to get this close to Niagara Falls, and in my opinion the falls are more spectacular than Victoria Falls in Zimbabwe. I do think the experience is very weather dependent though – I have heard that in a very dry season things can slow to a trickle.

There are also a ton of other places I want to go to which I have not made it to. Salvador – an Afro-Brazilian cultural and musical hub in the center of the coast, the Pantanal region deep inland, and some of the white sand beaches in the south of the country are atop my list.

On the downside, however, Brazil definitely feels much more dangerous than probably any other place I have traveled. I generally avoided Copacabana which is the famous beachfront area of Rio which overflows with prostitutes and generally shady characters who cater to American and European partiers. Fortaleza (city in the Northeast) did not seem particularly pleasant or safe. Most of Sao Paulo is not safe to walk around in alone after dark. While I don’t think these safety concerns make Brazil a place to avoid entirely, it is definitely worth having your wits about you at all times and only going out in groups at night.

Also, perhaps more than anywhere else in the world, there is a massive disparity between the very rich and very poor. The urban poor have built favelas or basically ghetto communities that support as many as 1 million people, and generally have their own justice systems, utilities, political organization, and (often gang-controlled) industries. Unlike a lot of the cities in Africa where the poor are relegated to the fringes of town, these favelas are built right into the fabric of the city. In both Sao Paulo and Rio, you can walk across the street from some of the cities nicest most modern skyscrapers and be in the heart of an extremely poor community.

Despite the raging poverty in many parts, Brazil has improved its economic situation over the past 10 years nearly as dramatically as India or China, though with much less press coverage (it is definitely the least talked about “BRIC” country). While corruption and the rich/poor gap remain major issues, the outlook (at least until the past few months) is brighter than it has been in decades. Brazil has become a clean fuel leader, and most cars run on sugar cane ethanol which is 8 times more efficient than the corn-based ethanol that has failed here in the US. There are still other, very serious environmental problems, perhaps the largest being significant deforestation in the Amazon, but this is one of the world’s biggest green success stories.

It is not yet clear how the economic downturn will affect Brazil, but in my view it is an under-appreciated economic and tourist destination, and I hope it will continue to prosper. And I hope to go back and spend even more time there.

China's stock exchange - revisited (updated 2/13)

It has clearly been a very difficult past 18 months for the Chinese stock market. While this is not entirely surprising given the bubble that I discussed in 2007 and the massive overall decline in world stock markets, the correction in China has been particularly harsh.

The chart below shows the SSE over the last two years. The index today is down 62% from its high and at its peak had declined 71%.


Further recent news shows that Chinese exports declined 17.5% YoY through January and imports declined a whopping 43%. While the China Daily calculates that about 1/3 of that import decline is due to the timing of Chinese New Year, the decline is still massive.

Given the decline in world demand for China's good and the rising job losses and deteriorating economy in China, is now the time to get out or get in to the stock market?

While I have less conviction that I would like, over the past month I have started to slowly dollar-cost-average into China's indexes. While I think it may be rough going for the short-term, I think now could be an attractive time to invest. I think a) China's government is much more likely to successfully implement a stimulus than the US government, b) although I don't have this data, I think the higher savings rates of Chinese middle-class consumers vs. American middle-class consumers will help buffer their internal consumption crunch somewhat, and c) the PE multiples of the SSE have declined to a much more reasonable level and at the last data I saw were actually below PE multiples of the US.

I also recently came across this quote from one of the leading global venture capital funds - again, no real data - but captures my sentiment well:

"Our investments in China are better positioned to survive a very prolonged downturn than companies in the U.S. Not only are the cost structures far lower, but the cultural familiarity with the challenge of survival makes the managements of most of these companies more resilient. (Bear in mind that even in good times the average savings rate in China's urban areas for high income earners has been close to 30%). Despite the many challenges that come with operating in different countries, we are relieved that we decided to reduce our overall dependence on the U.S. and can invest in markets that are growing more quickly and where there is a greater thirst for success"

Given the high likelihood that China's long term growth rate is substantially higher than the US, I am hopeful this will prove over the medium term to be an attractive buying opportunity.

Dubai collapse

Not entirely surprising but Dubai has collapsed and spiraled out of control.

Friends who have recently visited told me that the cranes which dotted the tops of nearly every building a year ago still are there, but all of them are stopped. Overpasses and infrastructure development have been halted in process with partially complete projects everywhere.

Finally, since in the UAE, people who are unable to pay their bills can go to Debtor's Prison, expat's whose real estate holdings have plummeted in value are abandoning their cars at the airport and fleeing the country.

This depressing story below is from the Times in London.

"For many expatriate workers in Dubai it was the ultimate symbol of their tax-free wealth: a luxurious car that few could have afforded on the money they earned at home.

Now, faced with crippling debts as a result of their high living and Dubai’s fading fortunes, many expatriates are abandoning their cars at the airport and fleeing home rather than risk jail for defaulting on loans.

Police have found more than 3,000 cars outside Dubai’s international airport in recent months. Most of the cars – four-wheel drives, saloons and “a few” Mercedes – had keys left in the ignition.

Some had used-to-the-limit credit cards in the glove box. Others had notes of apology attached t

“Every day we find more and more cars,” said one senior airport security official, who did not want to be named. “Christmas was the worst – we found more than two dozen on a single day.”

When the market collapsed and the emirate’s once-booming economy started to slow down, many expatriates were left owning several homes and unable to pay the mortgages without credit.

“There were a lot of people living the high life, investing in real estate and a lifestyle they couldn’t afford,” one senior banker said.

Under Sharia, which prevails in Dubai, the punishment for defaulting on a debt is severe. Bouncing a check, for example, is punishable with jail. Those who flee the emirate are known as skips.

The abandoned cars underscore a worrying trend. Five years ago the Emir, Sheikh Mohammed bin Rashid Al Maktoum, embarked on an ambitious plan to transform Dubai into a hub for business and tourism. A building boom fuelled double-digit growth, with thousands of Westerners arriving every day, eager to cash in on the emirate’s promise of easy living and wealth.

Many Westerners invested in Dubai’s skyrocketing real estate market, buying and reselling homes before building was even complete. But, as the recession took effect, property and financial companies made thousands of workers redundant and banks tightened lending. Construction companies have delayed or cancelled projects and tourism is slowing.

There are increasing signs that the foreigners who once flocked to Dubai are leaving. “There is no way of tracking actual numbers, but the anecdotal evidence is overwhelming. Dubai is emptying out,” said a Western diplomat.

International schools are having to be flexible on fees as expatriate parents run out of cash. Louise, a single mother from Britain, said that her son’s school had allowed her to pay a partial fee until she found a new job after her redundancy in December. “According to the headmaster, a lot of people had come into the school saying they had lost their jobs so the school was trying to be a bit more flexible,” she said.

Most of the emirate’s banks are not affiliated with British financial institutions, so those who flee do not have to worry about creditors. Their abandoned cars are eventually sold off by the banks at weekly auctions. Those recently advertised include BMWs, Porsches and Mercedes.

Simon Goldsmith, a spokesman for the British Embassy in Dubai, said that that there were approximately 100,000 Britons living in Dubai last year. However, the embassy has no way of tracking how many have fled back to the UK. “We’ve heard stories, but when somebody makes that kind of decision, they generally keep it to themselves,” he said.

Police have issued warrants against owners of the deserted cars. Those who return risk arrest at the airport.

Heading home

3.62 million expatriates in Dubai

864,000 nationals

8% population decline predicted this year, as expatriates leave

1,500 visas cancelled every day in Dubai

62% of homes occupied by expatriates 60% fall in property values predicted

50% slump in the price of luxury apartments on Palm Jumeirah

25% reduction in luxury spending among UAE expatriates"

Egypt - really, really old news

About 8 months late, I realized that I did not finish writing about the rest of my study trip to Egypt in January.

Cairo is a crazy big city that is impossible to get around. Most of my memories of Cairo are of being stuck in traffic in a cramped, hot bus in a suit. We had some cool meetings though in addition to the one with Orascom that I have already written about - a few government ministers, a non-profit, some energy companies, and a tech startup. But the cultural sites were what really stood out in Egypt.

The pyramids, though their size was impressive, were a bit of a disappointment. We saw them once during the day and once at a hoky light and laser show at night.

Luxor, a few hundred miles south of Cairo along the Nile, was really amazing though. We took a sunrise hot air balloon ride over the valley, and had amazing views of all of the temples, tombs, and ruins. I also found the Nile really interesting. While I guess I learned this in high school, the entire country of Egypt is desert, except for a stretch about 1-2 miles wide on either side of the Nile, which stretches all the way from its delta in the north of the country to southern Egypt. While this makes sense, it was still shocking to see firsthand how green the area around the Nile is, and how it instantly drops off to extreme desert just a few minutes walk away from the river.

During my travels through 33 countries over the past two years, I have seen a lot of really old stuff. But the sights in Egypt are staggeringly old. Many of the ruins that we saw were 4,000 to 4,500 years old! All of the ancient ruins that I saw in South America, India, China, Thailand, Japan, the Middle East, and Europe - none of them were more than 2,500 years old. And the Egyptian ruins including King Tut's tomb, Hatshepshut's tomb, the pyramids, and the many statues of pharoahs and sphinxes were as impressive as any of them. It puts the rest of the historical sights I have seen around the world in a different perspective, and also really challenges the American worldview where remembering things from 40 years ago seems like ancient history.

So while Cairo is not high on my list of places that I would go back to, I would love to spend more time exploring more of Luxor and Aswan, and explore the rest of the areas along along the Nile south of Cairo. Here are a number of Egyptian photo highlights.

Street market - Cairo

Boy carrying flatbread

Camels and pyramids

More Great Pyramids, Giza

Old building facade, Cairo

Hot air ballooning in desert over Luxor
Mosque in Egyptian desert Hot Air ballooning, fields by the Nile quickly become desert
Sphinxes, Luxor

Massive ancient columns
Hatshepset's tomb
Google satellite map showing the green by the Nile and the surrounding desert

Sapa - northwestern Vietnam

After spending a few days in Hanoi, we took a surprisingly pleasant overnight train to Sapa, near the Chinese border in the mountains in Northwestern Vietnam.

While Sapa was an ok little town in its own right, we spent most of our time hiking around and exploring the surrounding areas. The countryside around Sapa is the gorgeous lush green valleys and terraced rice paddies that you see in photo books. Little children played in the river with their water buffalos and local women sold the vegetables that their husbands farmed in town.

The area around Sapa is also home to a number of "minority tribes", with the Black Hmong and the Dzay being the two we spent the most time around. While the tribes have in many ways converted from their traditional way of life to surviving via tourism, they have retained their langauge, dress, and a lot of their social customs. We spent one day hiking on our own down into the valley from Sapa town to Cat Cat village, a Hmong village about 3 km from Sapa. It was a really cool hike, down a long winding path towards the town which was built by the river that runs through the Sapa valley.

Our second day in Sapa we joined a small group and hired a Hmong tour guide to show us around her town and lead us on a day trip through the rice paddies and bamboo forests. Ironically, my second weekend after quitting work in 2006, I spent three days and two nights hiking through northern Thailand and staying in Hmong villages. Now, in my second to last weekend of b-school travel, this hiking adventure made the Hmongs a surprising bookend to my past two years of travels.

Our Hmong guide - Cha - was a really smart 20 year old girl who spoke Hmong, Vietnamese, and pretty good English too. And, since Lizzle speaks Vietnamese, we got some extra insight into Cha's life. She met her husband at the "Love Market" in Sapa town at age 15. He is also Hmong, but from a neighboring village. They were married after two months, she moved in with his family, and they had a daughter when she was 16. Now, at age 20, she works guiding tourists while her husband farms part-time and finishes school. I am not sure how much of this was a sob story designed to elicit tourist dollars (I actually think it's not, but you never know) but she complained to us that her husband drinks and gambles away all their money. She wants to leave him, but she is so old now (almost all Hmongs marry in their early teens) that nobody else will marry him. And since he paid a dowry to marry her, she would have to pay a fee of 5 million dong (~US$300), 40 pigs, and 80 liters of alcohol to his family if she wanted to divorce him. She was also eager for her daughter to start school. Almost all Hmong boys go to schoool but many Hmong girls do not. And most Hmong girls who do go to school are not taught to read or write, they are just taught to speak Hmong and Vietnamese.

While her story was really sad, it was an interesting backdrop on the villages and countryside that we walked through which were stunningly beautiful. We hiked for a few hours in the morning, had lunch in a Hmong town (sandwiches, not Hmong food unfortunately), and then hiked for a few hours in the pouring rain in the afternoon. The trails became super muddy and by the end of the hike I had slid down countless slick patches and was absolutely covered in mud. Still though, I was not complaining - it was a really cool adventure.

Hmong women by old French church in Sapa town

Girl drying some corn on the side of the dirt road

water wheel by river in cat cat

children bathing and playing with water buffaloes

Green valley and terraced rice paddies
Dzay women resting by the side of the road
flowers
Me and our Hmong guide Cha by waterfall