And it will not just be the power sector but also in other areas like roads, ports and construction equipmen.  The biggest constraint is going to be political -- as the major Chinese players are still partially state-owned; hence it is no surprise that Premier Wen Jiabao will visit India in December to discuss these issues with the Indian Prime Minister Manmohan Singh.  -- Aadil

Chengdu is high on our list of cities to visit -- in our continuing series of forays into the interior provinces.  Spring 2011 seems to be the next likely window for a trip to this key city in the west.

When we get there, we will certainly be checking out Lan Kwai Fong Chengdu. 

As many of you will know, the original LKF in Hong Kong is a hugely popular bar and restaurant district right in Central -- the brainchild of local businessman Allan Zeman.  Back in the 1980s, Zeman opened the California restaurant because he wanted a western restaurant that met his needs.  The following year, he bought up the entire block and was well on his way to becoming the "father of Lan Kwai Fong."

Last year, Zeman -- who gave up his Canadian passport in favour of Chinese citizenship -- bought up a small neighbourhood along the Jinjiang River right in the central business district in Chengdu with the view of replicating the successful LKF model as a brand.  He tried once before in Shenzhen but failed to get the final approvals. 

LKF Chengdu promises to be a better and improved model with super stylish restaurants, bars and clubs.  There will be familiar Hong Kong names(Zen, Lei Garden) and international ones (Tony Roma's, Starbucks). 

Some establishments are already up and running while others are kitting out very quickly.  The official opening is slated for January or February in 2011 - "depending on the weather".

(As an aside, Shui On Land has even more ambitious plans to replicate its successful Shanghai Xintiandi development in cities like Hangzhou, Chongqing, Wuhan, Dalian and Foshan.  These are master-planned communities with residential and commercial developments, culture and entertainment all set amidst man-made lakes and gardens.)

This summer I traveled with my kids down both coasts of the United States, looking for a college that might take my eldest son.  I guess I had not traveled in the States for a few years, but I was struck by how expensive things have become for the casual tourist.  I felt the purchasing power of my dollars had declined by half in the last five years.

The Bureau of Statistics says the CPI is up 20% in the last five years.  Well, they are not spending their money the way I was if that is the case.

It was not that long ago that breakfast in a diner of coffee, juice, some eggs and toast cost about $5.  On our trip, it was hard to find breakfast for less than $10 a head.  Motel rooms that used to cost $50-60 were $100-120 minimum.  Of course, gasoline has more than doubled too. And a car that used to cost $50 a day for a long rental booked ahead is now $100 a day.

You’d have thought with a recession on that prices would be lower. But it seems the tourist business has managed capacity well to keep prices up. And many businesses have abandoned cheap as a strategy and moved prices up to meet wealthier consumers coming down to slum it through the tough times.  McDonald’s comes to mind.

Which brings me to another grouse: you can’t eat healthily while on the road in the US -- but that is another story.

So I left thinking that I need to preserve the value of my dollars and low- yielding treasuries are not the place.  -- Charles

Stand by for a secular increase in the price of goods coming from China. Either labor costs are going or the Renminbi is going up -- or both. Either way, inflation is on the way.

We say this after pouring cold water on such claims the last few years. But this time, several recent conversations point to this conclusion. First, we talked to a friend of a friend who is selling out of his electronics factories in Southern China because he sees long-term margin pressures -- with total costs of employing workers rising at 15-20% a year.  (CL:  This fellow does not seem willing to relocate his factories inland -- as many other factories have done and are doing -- to extend the life of his present business model.  Or to revamp/adapt his production to higher labour costs.)

Second, we talked to a manufacturer of carpets -- designed and sold in the US – anticipating that rising costs will squeeze his margin by 6% this year and again next. He cannot pass on the price increase in the US’ bombed our real estate sector.

Third, a report from Southern China, where factories who sent their workers home last year to cut costs are finding it hard to attract them back.  (CL:  not just factories.  A fast-food chain operator told us that 800 of their restaurant workers did not return to work after Chinese New Year, and they had to scramble to find new workers to fill the vacancies.) A dorm room, subsidized food and some money to send home to the family does not seem to cut it any more...for the so-called post-1980s generation.

Then Li and Fung explained to Celina that they are planning for increases of 5% a year in their ASPs in their current plan. Li and Fung is at the center of China-US trade and has in the past been managing price deflation carefully. This is an important turn in their thinking.

So the stimulus in China has put a lot of money into the system and wage inflation is the result. But the local consumer economy is developing as an alternative employer to the low margin export sector. We think the trend will continue whatever the short term monetary policy.

The question for the US is whether the cost push will be absorbed or passed on to consumers. We vote for ‘passed on’ for three reasons.  First, because the lesson of the last three years is how integrated Chinese manufacturing is into the US economy - as the bounce back in US imports from China to record levels shows. Chinese goods are cheap items in regular demand traveling through pipelines like Wal-mart’s supply chain. Second, there is no alternative supply anywhere near as cheap that can handle the volumes. Third, because a buyer-induced consolidation is already professionalizing the whole supply chain and leading to improved pricing for improved quality.

The last twenty years have seen steadily lower prices for consumer goods in the US as manufacturing has shifted to China. (The chart below shows how apparel prices have drifted down since 1993!)  Now that almost anything that can be moved to China has been moved, we cannot expect that trend to continue. It will reverse. Whether this will show through in the CPI will depend on what happens to service price inflation. And one can argue that with 10% unemployed, service price inflation will be subdued. I would not make that argument however. As a parent of three children aiming for college, I live in hope of some restraint in education sector inflation. I mean, the total cost can’t go above $50,000 per child per year, can it? NYU is advising parents to budget for $54,000 in total costs for next academic year. Clearly no recession in academia.

What you get are very well-dressed graduates who are saddled with student loans for a long time.  -- Charles

On a humid, rainy Friday afternoon, we hopped on the metro next door to our hotel and rode four stops to the Expo. The entrance area was largely empty at that hour (4 pm), but inside the grounds, there were huge crowds and long queues at various pavilions. The monitors informed us that attendance that day was over 300,000.

Three guesses as to which pavilion had the longest queue.... Saudi Arabia! (next door to India's), estimated waiting time: 5 hours!

Japan, Korea, Germany were more predictably popular.

Given our limited time there (from Hong Kong, we were able to buy only day tickets as the 3-day passes were sold out), we decided not to join any of the long queues. Instead, we decided to walk around and soak up the atmosphere. Most of the people were clearly happy and excited about visiting an important event, one that made them proud of their country.

We carried on walking the length and breadth of the Pudong side seeing most of the pavilions from the outside, chatting up volunteer helpers (all cheerful and enthusiastic) and eating and drinking our way around the grounds - starting with a beer in the Denmark pavilion (we did get in to see the Little Mermaid and the bicycles that visitors got to ride on) then Chilean wine in Chile, Turkish koftas and coffee, and ending up with Belgian beers in the EU pavilion.

We found out -- too late -- that we could have bypassed the lines at the UK pavilion, had we brought our UK passports, but all three of us had left them back in the hotel safe.

The Expo was extraordinarily well laid-out with lots of resting areas cooled by misting fans (you can just make them out in the first photo above), drinks and food trollies (in addition to real restaurants such as Ajisen and those inside most of the pavilions, serving national cuisines, dotted around the grounds), electric buses (made by Sunwin) and trollies gliding silently by on the broad roads, ferry boats taking visitors to the corporate pavilions on the Puxi side. There was evidence of many other "green" initiatives such "non-electric" central air-conditioning by Broad.

All through our time there, I felt that we were getting glimpses of what could be...models of urban development for China and other countries. I hope that the Expo sites along the river will remain as green park areas after the exhibitions are gone (except for the massive China pavilion which will become permanent along with some of the cultural and performing arts venues, I think).

We also came away with the idea that the Expo is likely to fuel the visitors' interest in seeing the rest of the world (including the rest of China). The volunteer who tried to explain to us why Saudi Arabia was so popular (all by word of mouth) because of the pavilion's hanging gardens, oasis and beautiful women said she really wants to go to many of the places that sparked her interest at the Expo.

As Aadil put it: there is probably no place else in the world that could have put on a show like this with the kind of daily attendance that they are achieving. And China has done a great job in organizing and execution. So score two for China (Beijing Olympics and Shanghai Expo); let's see if India pulls out with a decent Commonwealth Games....after all the bad press. -- Celina

Over the weekend, I read an article written by one of my favourite resident Indian journalists, Vir Sanghvi (who is not shy in voicing his opinions against the Indian government or even politicians).  Click the link below to his artcle entitled “Old India has failed New India, again”. 

Sanghi writes about the Commonwealth Games fiasco and the reasons behind it. One can pick up any British paper and read about collapsing bridges in the Games complex or about athletes pulling out due to perceived health or even terrorist risks. However, these articles do not address the real issue; Why was this allowed to happen in the first place?   

One of the great successes of the Indian growth story over the last 15 years has been the involvement of the private sector in all forms of infrastructure and services.  Pre-1991, India was a closed economy and licences to set up new businesses and manufacturing facilities were difficult or cumbersome to obtain.  People were happy with the so-called “hindu”  GDP growth rate of sub 5%.  This is what Vir calls the “Old India”.  Post-1991, India changed as the economy was opened up, import tariffs were cut, the licensing regime dismantled and private players (domestic and foreign) were encouraged to invest.  This is the “New India”.  While we will never get rid of the “Old India” -- some sectors like the rural economy need handouts from the government -- we had hoped that we had at least crossed the bridge in terms of the government's involvement in large-scale infrastructure projects, given its terrible track-record.

New airports in Bangalore, Hyderabad, Mumbai and most recently, Delhi have been constructed by a combination of large domestic private players with foreign partners. These airports are now world-class -- and this was only made possible by the involvement of the private sector. Look at the mobile telecommunications sector -- who are the leading players in a market with over 600 million subscribers?  Bharti Airtel, Reliance Communications and Vodafone -- all private players.  Even the auto sector is 100% controlled by private players with heavy foreign involvement.  Annual Foreign Direct Investment (FDI) in India has scaled up from $6bn several years ago to $30bn annually.

The Indian government decided to take care of the Commonwealth Games in Delhi themselves. “New India” was not involved.  “New India” was told to construct the new Delhi airport which is what they did and ahead of schedule (GMR Group runs the airport built by Larsen & Toubro – both private players).  The construction of the Games infrastructure has been a disaster waiting to happen. I guess we had got too complacent that the “Old India” would have grown up, learnt from Beijing in 2008 (Summer Olympics), and determined to put on a display of their newfound abilities...but they haven’t.  --  Aadil

Hefei is the capital of Anhui province, with a population of about 5 million, and is situated about 420 km west of Shanghai.  As a provincial capital, it is technically a 2nd tier city, though in terms of development seems more like a 3rd tier city.  These large but still developing cities are where much of the growth in China will come from, so we were keen to see for ourselves what the city was like as well as meeting some of the companies based there.  With a well-connected location close to Shanghai and Nanjing, Hefei has recently attracted international companies such as Unilever, Wal-Mart and Air Liquide as well as local companies such as Golden Eagle, Midea, BYD and 361 Degrees.  The city also had the foresight to establish technical schools years ago and to build a new science and technical zone which attract new fabs and factories with a good supply of skilled workers.

But initial impressions of Hefei were unimpressive, with the air pollution extreme and the whole city looking drab.  At the airport, we got into an LPG taxi with a tiny boot (most of it taken up by the gas tank).  Traffic was dreadful, the sky uniformly grey, and the drive into town passed endless kerb-side welding workshops and shabby concrete buildings.  Another concern was that we saw no sign of any of the Chinese brands who have been assuring us that they are busy expanding into these lower tier cities.

Driving around the city between meetings, however, the picture became clearer.  Large areas on the outskirts of the city are being rapidly developed, factories relocated and many new housing blocks popping up.  It appears that Hefei is developing as a multi-centred city, with much of the investment happening on the outskirts.

In the evening, we went to a large, city-centre, pedestrianized street, packed with many of the home-grown consumer names we have been following.  A very well-designed piece of urban development, broad and well-lit, incorporating a historic residence and gardens of a 19th century dignitary, it would not have looked out of place in Shanghai.  This was the consumer-spending evidence of the investment going into Hefei.  Many domestic and international clothing brands were represented, and the shops and restaurants were open and still busy at 9 pm.

We also found a Little Sheep restaurant, part of a national chain of Mongolian hotpot restaurants which we own in the Arrow Fund.  We had a chat with the manager, who was happy to tell us -- over a beer -- how he runs his business.  The attraction of this style of food is that relatively little preparation is done in the kitchen as the food is cooked by the customers at the tables.  All ingredients, including lamb, the most expensive, are ordered through the company’s central procurement division, to ensure consistency and quality.  At about US$ 9 per head for plenty of good, fresh food and several bottles of local beer, it is certainly not a cheap option, but the restaurant seemed well-run and was more than half full on a Wednesday evening.

We visited several companies: a vehicle manufacturer, an old and well-established brand of forklifts and earth-movers and an expressway operator.  We’re unlikely to be investing in any of these in the short term, but just as interesting was hearing about the companies and their perspectives on Chinese macro issues such as wage inflation and local government control over operations. 

The biggest shock of our stop in Hefei was the difficulty in leaving.  We had planned to take the new high-speed train to Shanghai (3 hours away), but because train tickets cannot be booked online, we showed up in Hefei without onward reservations.  The hotel business centre told us that all the trains to Shanghai on the Friday were sold out.  The choices facing us were trying our luck by queuing at the impressive new station for an hour or more in hopes of finding seats when we got to the window, or buying the tickets on the black market -- the option we eventually took, paying a 30% "commission".  Only 2nd class seats were available, but the cabins and seats were absolutely fine.  The train itself was new, fast, quiet and clean (attendants came  around several times to clear tray tables), and perfectly on-time -- in fact, just about as good as any train in Europe.  But the anachronistic method of buying physical tickets at the station (and only at the origin city!) needs to change and to change urgently -- a message we relayed to Ctrip management who say they are well-aware of the problem and have asked the Ministryof Railways about adding train bookings to their site, but it is too politically sensitive.

One recent evening, Lamya and I popped into a small, 24-hour chemist in town (Mumbai) to pick up a few things.  This was your standard small little chemist, but it is located just 5 minutes from the Taj and in between several other hotels.  The store manager saw me playing with my Blackberry; he was looking at me and I thought he was just curious about my phone.  He then asked me “So what about this Government ban on Blackberry, will it really happen?  I have been reading the papers that the deadline is approaching," etc., etc. [The deadline has been extended by 2 months].  I said that the government is working with Blackberry, and there should be some sort of conclusion.  He then said that “No way they will ban it.  It is so popular, businessmen need the phone...." etc. etc.   I just nodded, signalling to Lamya to hurry up as it was late. 

He then took out TWO Blackberrys from his table!   “I have  two, one for me and one for my brother and I'm really worried about this ban as this is my life.  I chat on messenger with my friends, suppliers and use email also.”  Initially, I was shocked – a small little chemist owner owns not one but two Blackberrys!  I got very curious, and soon it was Lamya's turn to bug me about leaving…

The manager is not the owner of the store; it is owned by someone else who pays him a cut of the profits each month.  Surely he can't be making that much to justify the purchase of two phones -- so maybe the owner bought the phone for him?.  He told me that the owner has 40 stores all around Mumbai.  So has he bought 40 new Blackberrys for each store manager?  And the phones were not old, they were a recent model. 

The proliferation of Blackberrys in India has clearly been led by Blackberry Messenger as well as being driven by cost.  The Blackberry is significantly cheaper than an iPhone which hasn’t picked up at all in India.  Now that PingChat is working across the three main smartphone platforms (Blackberry, iPhone, Android) I wonder if this will slowly change. Maybe Blackberry users in the developed world will switch to IPhones now that chat works across different technologies.  But until the cost of an entry-level iPhone in India comes down, the Blackberry is likely stay dominant.

I have met Blackberry's official and sole distributor in India but this is a just a small part of their profits.  How significant could it become if  chemists -- and other storekeepers -- across the country start buying them to communicate with their suppliers...and friends?  Instantaneous information flows clearly improve efficiency and are changing the whole way of life here, as they have in other places.  --  Aadil

Comment:  Remember how Aadil and Charles wrote about meeting farmers in the countryside checking grain prices with their mobile phones?  Information is essential for market efficiency.  And I guess RIM still has growth potential in emerging markets like India - but this time as the low-price option!  -- Celina (iPhone user...)

As we would have expected after the July 19th moves allowing institutions and companies to hold renminbi, yuan deposits in Hong Kong jumped 15.6% month-on-month in July to Rmb 103.7 billion, or 3.9% of total foreign currency deposits here. 

According to the Financial Times:

High unemployment levels have driven down wages for some low-skilled outsourcing services in some parts of the US, particularly among the Hispanic population. At the same time, wages in India's outsourcing sector have risen by 10 per cent this year and senior outsourcing managers based in the country command salaries above global averages.

Pramod Bhasin, the chief executive of Genpact, said his company expected to treble its workforce in the US over the next two years, from about 1,500 employees now. We need to be very aware [of what's available] as people [in the US] are open to working at home and working at lower salaries than they were used to, said Mr Bhasin. We can hire some seasoned executives with experience in the US for less money.

The narrowing of the traditional cost advantage is also spurring other Indian outsourcers to hire more staff outside India. Wipro, the Bangalore-based IT outsourcing company, started to recruit workers in Europe, the Middle East and Africa during the global economic downturn. Suresh Vaswani, joint chief executive of Wipro Technologies, forecasts that half of his company's overseas workforce will be non-Indians in two years, from the current 39 per cent.

Comment:  Companies like HCL Tech, Wipro and Infosys have long had operations in countries like Ireland and Wales, continental Europe and elsewhere to service their client base.  These globally competitive companies are not just about moving all operations back to India or some other offshore centre and do have "onshore" operations in other countries as well.  They will take advantage of business conditions as they arise -- and that means they can and will pick up workers in developed economies in this recession or "onshore" more even as their competitors or clients may do more "home-shoring". -- Celina

India's largest online travel company, MakeMyTrip (MMYT), has IPO'ed on Nasdaq, its price rising 88% on its debut last Thursday.  On their website, travelers can research, plan and book a wide range of travel services and products in India as well as overseas, including air tickets, hotels, packages, rail tickets, bus tickets, car hire and ancillary travel requirements such as travel insurance.  It looks as though air-ticketing is mostly a purely online business while hotels and packages are -- for now -- still done through their call centres.  Aadil says that he hasn't tried makemytrip.com as yet, but that his fiancee has and loves it.

At the moment, we are busy arranging our next foray into second tier cities in China in September: a quick 2-day swing through Hefei, the capital of Anhui Province, before heading to Shanghai (3-1/2 hours away by high-speed rail) for more meetings and visiting the Expo.  And then we will fly on to Tokyo. 

Surfing on and off for about a week (on a number of different hotel booking sites), I finally booked our Tokyo hotel on elong.net (a Chinese online travel site, also Nasdaq-listed, symbol LONG).  Because Expedia owns 36% of elong, the selection of international hotels seemed better than that on ctrip.com. 

Ctrip.com (symbol CTRP on Nasdaq) is the most popular and most widely used travel booking site in China and thus more focused on domestic and inbound travel.  Previously, I booked hotels for our Xiamen visit in May on ctrip and everything went smoothly.  (I also sent an enquiry via ctrip's website on some technical issues and received a well-written English reply from them within a few hours).

In researching hotels in Shanghai and Hefei, it seemed to me that if both ctrip and elong offered the same hotel, for the same dates, ctrip had significantly better rates.  For Shanghai, I looked through the reviews on booking.com (part of the Priceline group) and Tripadvisor (Expedia group) and thought we should try the Marvel Hotel, a new business hotel concept brand by Shanghai Jin Jiang International Hotels (HK- and A-share listed), in the old Shanghai YMCA, a heritage building built in 1931.   

I checked rates for Marvel on both ctrip  and elong against booking.com (about the same for ctrip and booking.com but elong was definitely more expensive).  I was all set to book the hotel with ctrip (quoting in Renminbi) because booking.com can only quote a USD rate which may fluctuate if the yuan appreciates between now and the scheduled stay -- only to find that there were extra booking conditions imposed.  Ctrip is only allowing each person to book one room during the busy Expo period and through to the end of 2010 whereas the hotel's own website did not have this limitation. Since I was booking 3 rooms, I ended up booking directly on the hotel website.

In Hefei, I found -- on ctrip -- yet another new-ish, Hong Kong-based (and homegrown) hotel and resort brand to try.  The hotel group has growing presence in lower tier cities in China (e.g. Changchun, Wuhan, Hefei, and Shiyan) as well as in Vietnam, Indonesia, Philippines, Malaysia and the Middle East.  The group currently manages over 10,500 rooms (32 hotels and 26 projects) and has ambitious expansion plans to reach 12,000 rooms in 65 properties by the end of 2011 and 14,000 rooms in 85 locations by 2012.  In Hefei, we will be trying the older property in town as their new one in the High Tech Zone near the new airport is slated to open only later this year.   Will let you know of our experience in Hefei after our trip.

In Japan, the most mature of these markets, Isami uses Rakuten and Yahoo Japan for his domestic travel needs, but for overseas trips, he finds the Expedia US site to have better prices than its Japanese counterpart, particularly for combo packages (e.g. air+hotel).

We are also planning our trip at Christmas to Mumbai for Aadil's wedding, and we will definitely try to book our post-festivities' rail tickets (Delhi-Agra) on makemytrip.com.   In China, online booking of rail tickets is not available as yet....which is a real pain.  With high-speed rail -- where available -- a preferred substitute for domestic flights for distances of up to 1000 km, it would be great if one could make all the bookings online before the trip, rather than have to rely on the hotel concierge or a trip to the station to buy the tickets on arrival.   It will happen -- just a matter of time..... -- Celina

It is often easier -- and more engaging -- to hear fund managers talk about their views of the markets and economies than to read them.

Here, Aadil discusses the thinking behind some of our recent portfolio moves (12 August).

Aadil on CNBC TV-18 in Mumbai

I was just down south visiting companies in Hyderabad and Chennai.

This is the first time I have been back to Hyderabad since they opened their new airport (2008). The Rajiv Gandhi International Airport (it seems that every major infrastructure project in India is named after Rajiv Gandhi) is really a fantastic airport.  It was built by the GMR Group and Malaysian Airports.  The GMR group have also built the new Terminal 3 in Delhi – which is one of the largest airports in the world. 

In Hyderbad, the transportation links to town were also not too bad:  they have constructed a highway to take you into town. It took me less than an hour at 7pm on a Tuesday evening to get from town to the airport.  If it was Mumbai...i would have missed my flight.  I thought they could have more eateries after check-in as I didn’t see too many places to eat. There was a standard Mcdonalds but that was outside at the Arrivals segment.   They only have 15 aero-bridges now at the airport but they are looking to expand over the next 5 years. (In contrast, Terminal 3 in Delhi has 78 bridges)

The Chennai airport is also being rebuilt and should be ready next year. It's still the same old airport at the moment.

It seems that Mumbai will be the last major city with an older international airport (the new one is expected to be ready in 2012) along with Kolkata. But the city has a very nice, new domestic terminal from which I flew.

So the country is getting there; and the change in airport scenery is solely down to the new Private-Public Partnership Bidding. As there is no way the Indian government would have built airports like these without private participation. Cochin, Hyderabad, Bangalore, Delhi and Mumbai have all been expanded, renovated and rebuilt by private players along with foreign technical expertise.

Wages down south are rising 20% pa for unskilled and skilled labour. I heard this from a few companies.  The government's rural schemes like the NREGA have led to many unskilled labourers preferring to stay home and earn INR 100 a day from this, rather then lift forklifts and earn INR 300 and stay in dorms and away from their family. (Sounds a lot like China.)  Maybe the salaries need to go up more to attract workers to come from their villages and work for larger organizations.  The NREGA has been a brilliant for the rural population by providing a social safety net (43m individuals have benefited from this), but it has led to wage inflation in the factories and cities. I don’t think the government would have ever imagined that.  -- Aadil

The Japanese Robot Association said last week that orders for industrial robots were up 230% YoY in the Apr-Jun quarter. That was the third consecutive quarter of positive growth. Production grew 150% YoY at the same time. This was the second consecutive quarter of positive growth and production has recovered more than 70% of pre-Lehman shock level. Total shipments increased 130% YoY during the quarter, mostly driven by exports, which were up 200% YoY. Domestic shipments turned positive (+28.7%) for the first time in nearly 3 years.

Domestic shipments of robots were mostly supported by demands in electronics/electrical industries, especially those in telecommunications equipment, electronic components, FPD glass substrate and semiconductor wafers. Demands in automotive industry were still sluggish and would probably remain so for the remainder of the year.  

Overseas shipments were healthy and supported by very strong demand from Asian automakers, especially Chinese auto industry where the need for further automation has been increasing. Shipments to electronics and electrical industrial customers were also robust thanks to strong growth and outlook in FPD and semiconductor manufacturers. Bright outlook for telecommunications equipment, such as mobile phones, smart phones, slate type personal computers and large-thin screen televisions should also be excellent tailwind for major robot makers. 

The Nikkei reported last week that major industrial robot makers had recently pushed their effort further into a wide range of business fields, such as food and pharmaceuticals. While this is not new to us, it confirms companies' effort in diversifying its offerings based on technology strength accumulated in more traditional industries, such as automotive and electronics. Until recovery in areas such as automotive makers becomes more apparent in both domestic and overseas markets, ventures in new fields should open up more opportunities and earnings buffer for these robot manufacturers.  -- Isami Takenaga

From SCMP:  The 2009 report by Geneva-based Airports Council International shows that Beijing Capital International Airport has moved into 3rd place -- behind Atlanta and London -- in terms of total passenger traffic (domestic and international), knocking off Chicago O'Hare. 

Last year, BCIA served 65.37 million flyers, up 16.9% year-on-year.   Chicago saw its passenger numbers decline 6.1% last year.  Tokyo and Paris CDG also saw declines of 7.2% and 4.9%, respectively.

Hong Kong, with no domestic traffic, overtook Amsterdam's Schiphol to be the 3rd busiest airport in terms of international passenger traffic with 44.98 million passengers (down 4.6% y-y), after Heathrow and Paris. 

The SAR also kept its top spot as the busiest airport for cargo excluding mail (handling 3.35m tonnes), well ahead of Seoul Incheon (2.27m tonnes).  Dubai's air cargo throughput rose 6.1% to 1.85m tonnes to push them from No. 8 to No. 3.

A more telling statistic:  Among the 25 fastest-growing airports in the world, 17 are Chinese, including those in second-tier cities Wuhan, Changsha, Sanya, Chengdu, Xian and Chongqing.

Lower-tier city growth and travel and tourism in China are two of the themes that we track closely, but the stock plays in these areas are still few in number and mostly unseasoned. -- Celina

An ex-colleague of mine, Vincent Chan, now head of China Equity Research at Credit Suisse, has just sent out a 50-page note entitled "Analysing Chinese Grey Income".  Credit Suisse sponsored Professor Wang Xiaolu of China Reform Foundation to do a follow-up study to his first survey (published by CS in March 2008 and using data from 2005) investigating the extent of understatement of income in the official household survey done by the National Bureau of Statistics.

Prof Wang's new survey covers 19 provinces, 64 cities and 14 counties, with a final sample size of 4195 households.  Based on the responses to his questionnaire on total spending, particularly the percentage of food consumption to toal expenditure, Prof Wang reckons that there could be as much as Rmb10 trillion (or 30% of GDP) in hidden income.

His estimate of per capita disposable income -- using 2008 data -- is higher for every household income group, with the overall average at Rmb31,154 (US$4602), compared to the official Rmb16,885 ($2494).  Not surprisingly, the largest gaps between official and his estimates are for the highest income categories (the top 20%) and much smaller for the lowest strata.

The implications on the size of China consumer market, especially at the high end, are clear -- and may explain why, despite their strong market positions, "China only accounts for 3% and 5% of sales for Volkswagen and Pepsi, respectively.  In contrast, Greater China (mostly mainland China, as they are also major buyers of such items in Hong Kong) accounted for 10%, 20%, and 28% of sales by LVMH, Richemont and Swatch Group, respectively -- all major luxury goods companies."

If you are interested in learning more about the survey, drop us a line. -- Celina

The China Securities Depository and Clearing Corp. said that investors opened 287,765 A-share accounts last week, up 13% week-on-week.  This follows a 10% rebound in the Shanghai Composite Index in July. 

But beware, retail investors account for two-thirds of A-share market turnover and many tend to jump on the momentum bandwagon!

We often marvel at the speed with which emerging economies adopt new technology, so much so that the more developed economies can seem very slow off the mark.  There is a good reason for this -- the more mature economies carry the baggage of older, more established technology and the vested interest to make money off the installed infrastructure for as long as possible.

One area where there isn't quite the same "old" technology problem is books and other printed media.  In the context of Amazon slashing prices for the Kindle e-reader to try to tap the mass market (and remain competitive in the face of the iPad and Apple's iBook app), we came across an interesting article in today's South China Morning Post about how the digital wave is hitting the shores in China.

According to the SCMP article, the government's General Administration of Press and Publication reported that the total value of digital pubications (Rmb 79.9 billion yuan) overtook traditional print publications in China for the first time last year. (Amazon recently announced that their e-book sales have just overtaken hardcover sales). 

 A survey by the Chinese Institute of Publishing Science found that among those surveyed, half of those aged below 29 read digital content and 91% said they would not buy printed books if they could read an e-edition.

Hanvon claims to have sold 270,000 of their e-readers in China and 90% of the market.  They expect sales of 2 million readers this year.  But they may eventually lose out to other digital devices such as mobile phones and PCs.

Sadly, Joint Publishing -- a Hong Kong book retailer -- has decided to close its flagship bookstore in Guangzhou -- open since 1994 -- because of high rents and the drop in custom which they attribute to changing reading habits.  In Hong Kong, local bookstores are still very crowded with many people browsing books and magazines.  Will this last?

Shanda Literature, a wholly owned subsidiary of Nasdaq-listed Shanda Interactive Entertainment, is launching its own Bambook reader which is promised to have access to China's largest digital library with 3 million titles and more than 1000 journals.  Shanda Literature has been on the acquisiton trail, buying up a number of Chinese online literature sites such as readnovel.com, qidian.com, hongxiu.com, jjwxc.com and rongshuxia.com. Shanda seems to harbour international ambitions as there are reports that it has registered a subsidiary in Singapore and will offer its site and selections in both English and Chinese.

Taobao.com, Alibaba's online shopping subsidiary, is also getting in on the act with a new literature channel, partnering existing online sites like readnovel. com

I have been reading e-books on my iPhone (using the Stanza app) on my 25-minute train commute for some months and now look forward to my ride so I can get on with my latest book.  One morning last week, I left my phone at home and was miffed that I had nothing to read on the train; the ride seemed twice as long. 

Recently, I have noticed a few more fellow commuters reading books on their smartphones instead of playing games or watching TV or videos.   That is encouraging!   -- Celina

On July 19th, the Hong Kong Monetary Authority and the People's Bank of China jointly announced new measures to allow greater Renminbi (RMB) activity by banks in Hong Kong.  According to Norman Chan, the chief executive of the HKMA, "there will no longer be restrictions on banks in Hong Kong in establishing renminbi accounts for and providing related services to financial institutions; and individuals and corporations will be able to conduct renminbi payments and transfers through the banks."

"I expect that many more types of financial intermediary activities denominated in the renminbi will be introduced in the market, helping Hong Kong's renminbi business platform leap to new heights," Chan said.

According a sell-side strategist at Nomura, this deal will allow financial institutions to open mainland bank accounts; individuals to transfer RMB between onshore and offshore accounts; and new financial products to be offered with the ability to pay interest.  Hong Kong companies will also be able to raise bonds or equity denominated in RMB.

The ability of Hong Kong banks to transfer RMB deposits seems to imply that there will effectively be an interbank market in RMB (!)..the beginnings of a market-determined interest rate?

Following this latest round of liberalization, companies like ours -- with few or no business transactions with entities in China --  are no doubt asking their banks to set up Renminbi accounts. 

We are also asking our custodian bank to set up a RMB account for all of our funds.

Our bank confirms that  there is no limit on daily FX transactions into or out of RMB and call deposits over RMB200,000 (equivalent to just under USD30,000) are currently being paid 0.5% interest (versus 0.01% for HKD and USD).  The interest rate for 12 months RMB fixed deposits is currently 0.8%.

As you would expect, the PBOC isn't inclined to encourage short-term traders to speculate on the currency so the FX spread is pretty hefty at around 85bps. 

The very next day after the liberalizations were announced, local banks in Hong Kong rolled out new insurance-linked products with payouts in RMB.  We can expect to see more new products forward.

The rankings are based on 1-Year returns.  We look pretty good on a 5-Year view too.

Please note: 

The fund name should read Stewart Asia Fund.  Stewart Asian Holdings N.V. was merged into Stewart Asia Fund in 2008.  We are working to get this corrected at Morningstar.

The rankings also do not screen for the base currency of the funds.

Aadil appearing on CNBC and discussing some very topical issues and concerns about these two large economies with Bernie Lo and Oriel Morrison:

Out of India and Into China

Riding on the China Consumer

We have been planning and taking trips to second- and lower-tier cities in China for the past 12 months or so.  In the global financial crisis, the coastal regions suffered more from the sudden and drastic drop-off in export orders.  China's fiscal stimulus programme was directed at the interior -- in part, to create jobs from migrant workers laid off by factories on the coast and to prevent social unrest and malaise. 

The upshot is that the cities in the interior weathered the crisis better, saw faster growth and many younger workers now choose to remain closer to home rather than endure more hardships (even if at higher pay) living in a dormitory in a foreign province.

Visit these cities and it is clear that the consumer revolution is under way in China.  The current round of wage increases are making up for the modest cuts or flat wage rates from 2008 and 2009.  Urbanization continues apace.  Young employed workers are willing to spend more on themselves than their parents did.

As a result, we see a proliferation of home grown brands doing very well outside of the Tier 1 cities.  This is all part and parcel of China's evolutionary development and we also see it as transformational for the country. 

With the central government policymakers' blessing, personal consumption is being looked upon as an important new source of growth -- at a time when China is starting to go through the same process that Japan, Korea, Taiwan and Hong Kong did in the 1980s and early 1990s, of absorbing higher wages with higher productivity and to give up the more labour-intensive, lower value-added industries.  We think this is a multi-year process, and we want to participate in the growth.  The Arrow Fund will be our vehicle for doing so.

Click the link below to watch the video clip:

CNBC's Oriel Morrison talks to Aadil Ebrahim

We apologize for the complete dearth of blog entries for so long.  The fact of the matter was that we removed our original entries after discussions with our regulator on whether the entries constituted marketing to investors resident in Hong Kong.

Anyway, we have now restarted the blog while continuing to point out that our funds are offshore, Cayman Island-registered funds, not authorized in Hong Kong. 

We will be catching up with some entries dating back a few months. 

As always,  please feel free to contact us with comments or if you would like more information on any of the topics that catch your fancy.

The Bowen Team

In November we visited several gas companies in China.  The demand-side case for gas in China is easy to make: the country is growing rapidly, is keen to explore all alternatives to coal, is rapidly urbanising and increasingly using gas for vehicles.  However, there are obstacles, the largest being that gas prices are controlled and presently held low.  The timing, size and methodology of any change in the regulated price are unknown so present a considerable risk to the domestic companies in this area.

One question is what part of the value chain to be in.  Caught between various pieces of legislation and price controls, there are pitfalls for extractors, pipelines operators and local distributors.  One business that seems to be less regulated and with a demonstrated demand is supplying gas to vehicles, as it has less of the political impact of supply to homes or industry and there is a clear demand (demonstrated by the long lines of vehicles waiting outside gas refilling stations).  -- Tim Summers

One of our themes at Bowen is that future growth in China will come from domestic demand in the lower tier cities.  In November 2009 we travelled to two second-tier cities, Wuhan and Nanjing, visiting a range of companies to look for companies that may not have attracted foreign investor interest, especially when compared to their counterparts with Beijing, Shanghai or Guangzhou presence.

We found a very mixed picture.  On the negative side, we saw an industrial machinery maker who, despite having world-class equipment, had a huge amount of half-finished materials sitting around on wooden pallets.  A production engineer with knowledge of just-in-time techniques would be able to transform that company.  On the other side, we visited a listed retail company with 600 outlets and USD 1.5 billion in sales (in a province of 70 million people), which is totally off the radar for the foreign investment community.  This local chain is competing well with the likes of Walmart and Carrefour.

The government is encouraging manufacturers to expand or relocate their production facilities from the coastal areas to the interior and western China.  The big move has started but will probably take a while to gather momentum, but the reluctance of the new generation of workers to travel far from home for their job -- and then having to fight the crowds at Chinese New Year or other golden week holidays to get home -- means that labour mobility may be slipping.  Employers will have to go to where the workers are. 

Smaller cities should benefit from this flow of investment and the creation of new jobs.   This will translate into further development of the consumer retail and services sector.

In early May, we visited Jinjiang in China’s Fujian province.  This medium-sized city is where one quarter of the world’s sports shoes are manufactured.  We attended a couple of trade shows, mingling with local franchisees and store buyers to view the new season's lines and product.  We also met with the management of three of China’s leading home grown sportswear brands -- all with growing national presence, especially in lower tier cities where Nike and Adidas are not as well-represented at the moment. 

The model for all three companies is that they do the design and manufacturing (split between in-house and outsourced), and sell to the distributors and franchise holders.  Instead of splitting their energy with running the retail shops, they focus on managing the brand and designing and producing the merchandise but maintaining control over brand image, store formats and so forth.  The trade fairs exhibit to the distributors and shop operators the designs for the new season -- in this case, the Winter styles -- and preliminary orders are placed at these fairs.

We were impressed with the sophistication of the operations.  The companies place a lot of emphasis on educating their customers, through technical and fashion shows to demonstrate the advantages and features of the new models.  Subtly, they also trial new styles and fabrics to gain acceptance, and sometimes scale back order sizes to create exclusivity in the same way that top-end Western brands do.

Also impressive was the level of understanding of brand positioning and marketing.  While all three companies aimed for the domestic Chinese mass-market, they had differing approaches to sponsorship and to partnering with foreign, expensive brands.   It is also encouraging to meet CEOs and COOs wearing their USD 20 sport tops, baggy board shorts and garish basketball shoes to meetings...just at the fair, though.

                                                                                   -- Tim & Celina

Out of the archives at HSBC are some wonderful old photos, including some of Aadil's family.  The trading house Abdoolally Ebrahim & Company was the Bank's first client in 1865.

The Ebrahims in fact established the first ferry service across Victoria Harbour, pre-dating the Star Ferry.  Aadil's grandfather is pictured sitting in the middle of the company's group photo taken in 1938.

Click the link below to watch the clip.

The Pioneering Ebrahims