Editor's Note: Jon D. Markman writes a weekly column for CNBC on MSN Money that is republished here on
A flight into Beijing these days begins the descent into a kind of hell.
It's not just the smog, which is pervasive, gray and suffocating on an epic scale. It's not just the weather, which is unseasonably cold and windy. It's not just the sand, which is blowing in from inner Mongolia in thick, yellow sheets. It's not just the traffic, which is inert because of the stunning lack of major crosstown freeways. And it's not just the vibe of the city's residents and laborers, which is often foul and hostile amid the pollution and crowding.
It's the sense of alienation and hopelessness that you get from so many of the kind and brilliant people who have grown up there and who should have the greatest stake in its success.
It's one thing, after all, to live and work in a city that is suffering short-term growing pains toward a sunny future. It's quite another to work in a town that's in the perverse process of being dragged backward into an industrial revolution that the West experienced a century ago, when expectations for living standards were so much lower.
I visited Beijing last week in advance of Chinese President Hu Jintao's arrival to my hometown of Seattle, and I discovered that, for investors, the situation is paradoxically both grave and ripe with opportunity.
There's little doubt that China's capital city is at the spearhead of the sort of double-digit, multiyear economic growth that you have read so much about; construction cranes disappear high into the gray haze virtually everywhere you turn. Yet the pace of super-development seems almost too great, and it may ultimately prove to be the country's undoing, as it is losing many of the smart, ambitious people who have fueled its dystopian miracle.
A Disjointed Middle Kingdom
Dan Zhou is a Shanghai-born, MIT-educated economist who is one of the leading analysts of the growing crisis in Beijing -- and he is not terribly optimistic.
We met in his office on the 10th floor of a downtown high-rise, where he studies Chinese business trends for overseas investors as head of the independent research firm CEB Monitor Group. The room swayed and moaned as winds sweeping down from the Gobi Desert buffeted the unsteady building.
Zhou first pointed out that, despite skepticism from some Western investors who think the theme is overhyped, China's infrastructure build-out is still in the early innings. "Don't bet against the cycle," he said, arguing that all the road, building and power investments made so far have only helped the country begin to play catch-up after decades of underinvestment.
The development of modern freeways, bridges, water-supply infrastructure and electrical plants for key hubs such as Shanghai and Beijing alone is nowhere near complete. And yet those cities are home to less than a tenth of China's 1.3 billion citizens. If there is the political will to extend progress to the interior of the country, Zhou believes the recent success of concrete makers such as
( RIN), of Australia, and
, of Mexico, should go on for many years.
Vast sections of downtown Beijing, for instance, today lie in rubble as officials bulldoze lively, old single-story neighborhoods, called "hutongs," in anticipation of new construction later on. They are being rebuilt into denser -- and far less socially connected -- apartment buildings by government-sponsored workers that labor at a snail's pace, with little of the basic safety equipment that Western workers take for granted.
The erasure of hutongs is emblematic of a deeper theme Zhou believes investors must acknowledge: the division of China into two "disjointed" nations, divided by wealth. Just as it is hard to understand how the country can have both a Communist political system and capitalist economic system, it is hard to understand how it can be the rich financier of America's budget deficit on the world stage and yet be backward at home.
The uncomfortable fact, Zhou says, is that a thin sliver of urbanites has emerged -- typically through Communist Party connections -- as the super-rich, while much of the rest of the nation, including the hard-striving middle class, languishes in Second and Third World conditions.
A housing tract that I visited in the suburbs, for instance, did not have indoor plumbing or regular garbage collection; fields were strewn with plastic waste. City-center restaurants featured tremendous quantities of high-quality meats and vegetables, yet streets are rife with beggars and impoverished vendors. Thousands of newly planted trees lined freeways, yet most appeared dead, or nearly so, for lack of water.
A Dangerous Disconnect
The government needs to resolve this economic gulf, as a nation in which a tiny minority enjoys the fruits of economic reforms could easily dissolve into chaos. Ironically, a similar disconnect between rich and poor in Europe and America resulted in socialist and communist movements, and governments fought back by implementing reforms.
In the meantime, many leading citizens are voting with their feet. More than three-quarters of the well-educated people I spoke with expressed a desire to leave the country, in large part because of fears of the effects that pollution was having on their children. As an example, an expert in the design of power transmission told me he had found a job with a large electric-grid construction firm in the Canadian city of Calgary and was in the process of moving his family.
With 1.3 billion people to draw from, China will replace this engineer. But it cannot afford to lose so many of its best and brightest, who in my small sample expressed little of the sort of pride of country that you hear virtually everywhere else in the world. In private conversations, people express no great fondness for the feudal distant past, the communist recent past or the hypercompetitive, money-focused present. They're not antigovernment, necessarily, just cynical and apathetic amid a daily battle to survive and get ahead.
Many expressed exasperation with the breakdown of a sense of community, noting that while families are still close-knit, few knew or cared much about their neighbors. In just a week, I witnessed several acts of open interpersonal hostility, including one screaming match in which a woman tore a branch off a tree to threaten another woman.
To be sure, I also witnessed and experienced incredible kindness and generosity -- and was delighted to walk through a major park on a Saturday to find hundreds of people engaged happily in a dizzying variety of sports and hobbies in small groups, from folk singing to cards, tai chi and local versions of hacky sack, badminton and tennis.
If the government does decide to focus on reform to promote this sort of harmony, it may need to curb the construction of ports and railroads built for the convenience of its foreign business partners and turn its spending instead toward domestic improvements less immediately favorable to foreign investors, such as improved green belts, hospitals, schools and water systems.
This is certainly the outcome most optimists would like to see, but there is also the potential for a much darker path. Zhou notes that although Asia is now peaceful -- relative to the Middle East, anyway -- there is a "vacuum" that could be filled by the sort of nationalism that emerged in Germany in the 1930s. Already there have been protests against Japanese companies. If pressed, the country's clever propaganda machine could refocus its citizens' antigovernment anger toward South Asian, American and European interests. Despite its tremendous size, after all, China is very resource-poor -- and if its leaders find themselves cornered, they may well feel the need to reach out and grab energy, food and water supplies through force. The People's Liberation Army is the world's largest, although it is said to be relatively ill-equipped. That may be purposeful. In a sign that the government does not trust its soldiers, few of the security forces on the street carry weapons.
For now, though, there's no need for investors to get overly concerned about the potential for violence, as the stakes are high and domestic reorganization and improvement is much more likely. Your strategy to take advantage of China's pain and promise does not need to be complicated.
Consider shares of major international cement, steel and construction companies, including such Europe-based heavy industrial firms as
of Sweden and
of Germany. Smaller companies to put on your list should include pollution-control systems maker
, water-pump maker
and water-systems provider
At the time of publication, Jon Markman did not own or control shares of companies mentioned in this column.
Jon D. Markman is editor of the independent investment newsletter The Daily Advantage. While Markman cannot provide personalized investment advice or recommendations, he appreciates your feedback;
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