Could Lead to the Biggest Gains of Your Life
Honestly, I was nervous…
I was asked to speak at the New York Stock Exchange last month… on a panel discussion full of PhD experts… about China’s new multitrillion-dollar infrastructure plan.
The PhDs had flown in from Beijing and London, among other places. Hundreds of Wall Street bigwigs were in attendance – all waiting to hear what we had to say.
But what was I going to say?
“What do you want me to talk about?” I asked Brendan Ahern, the Chief Investment Officer of KraneShares. It was his show – the China “One Belt One Road” Summit – held to commemorate KraneShares’ newest China fund.
“Will you tell that story about the biggest mistake of your investing career?” he asked.
“Really? You want me to tell the story of my biggest investing failure… to a room full of investors in a private meeting at the New York Stock Exchange?”
“If you don’t mind,” Brendan said.
So I did.
Here’s the story I told them: The worst mistake of my investing career…
In 1996, I visited China to check out the investment prospects.
During my most important meeting, I couldn’t help but snicker to myself. “There is no way any of this will ever be accomplished,” I thought.
I was standing on “The Bund” in Shanghai – looking across the Huangpu River at mostly undeveloped land.
“What you see across the river,” the executive said as he beamed with pride, “will be greater in all ways than Manhattan.”
I squinted my eyes and peered into the distance… looking for signs of, well, anything. But I couldn’t picture it. And I’ve spent a quarter-century spotting investment ideas before anyone else could see them.
There was a start… a big building or two, most notably the Pearl Tower. But you needed an unreasonable amount of hope to see a futuristic Manhattan across the way.
I was certain there was no way China could come close to completing such a massive buildout. NO WAY!
And then, it did…
The “THEN” photo above was essentially the view back then…
We walked the few steps back on The Bund to his office, which was essentially a double-wide trailer. There were more executives inside, all wearing semi-white short-sleeve dress shirts and smoking cigarettes. It wasn’t a high-end look.
This office was the home of Shanghai Lujiazui Finance and Trade Zone Development Company. That probably means nothing to you now… But back then, Lujiazui (as it was known) was the biggest stock on the Shanghai “B-share” market. It was the biggest blue-chip stock that foreigners were allowed to buy.
I was really hoping to be impressed. But I wasn’t.
The executives took me over to a massive boardroom table. They had put hundreds – possibly thousands – of skyscraper models on it. It looked something like this…
In 1996, when you looked across the river from The Bund, all you saw was the Pearl Tower (the “Space Needle”-type building circled on the left) and a couple others, as I showed you in the first picture.
Looking at that scale model, I was certain there was no way China could come close to completing such a massive buildout. NO WAY!
And then, it did…
Today, this area is a glitzy financial district with futuristic-looking skyscrapers, luxury dining and nightlife options, and panoramic views. (You can watch a brief YouTube video about the area here.)
If I was a Hollywood producer and wanted to set a movie 20 years in the future, I would go here. I’m not kidding. Yes, it’s the future. And yes, it’s China.
You get my point…
In less than two decades, China turned acres of dirt into a city that is more futuristic than Manhattan. It is the single greatest infrastructure achievement I have seen in my lifetime. It is one of the greatest transformations in the history of man.
I didn’t believe for a second that it could be done. And I have never been more wrong in my investing career.
Fast forward to last summer. I was in Beijing, eating dinner with a friend who has lived in China for decades.
“You don’t understand, Steve…” he said. “Every major city in China looks like this.”
All the Americans at the table went quiet.
This massive difference between reality and perception creates a massive investing opportunity for us in China today.
We were sitting at Din Tai Fung restaurant. According to the New York Times, it’s one of the top 10 gourmet restaurants in the world (not just Beijing). Anthony Bourdain said he’d “travel half way ‘round the world to eat dumplings at Din Tai Fung.”
We’d walked 200 yards from our hotel to the restaurant – past Tesla car-charging stations, ultra-modern high-rises, and perfectly manicured streets. Honestly, it felt like we’d stepped into the future. This is Communist China?
We had already decided that Beijing today is the most modern city any of us had experienced…
Where else other than Beijing can you buy a bottle of wine out of a vending machine… with just your mobile phone?
Payment via your phone’s WeChat app is all this vending machine accepts. Cash and credit cards are no good. We talked about WeChat in last month’s issue of American Consequences. It’s owned by Tencent (OTC: TCEHY), which I predict will become the world’s largest company someday.
Again, we had just spent a couple of days in and around Beijing. This is the reality in Beijing. Life here is as futuristic as it gets. Can all the major cities in China be even close to this?
Our dinner host – an American-born Chinese executive who has lived in China for decades – said yes. And I can personally confirm it based on the Chinese cities I’ve visited.
The thing is, the American perception about China is different from this reality…
This massive difference between reality and perception creates a massive investing opportunity for us in China today. Once-in-a-lifetime profits are possible.
When the massive difference between reality and perception goes away, the potential for these gains will disappear too. Let’s take a quick look at some current misperceptions. And then we’ll move to the reality… and the incredible opportunity…
The American Perception of China Today
I’m fully aware of the criticisms of China… I get them in my inbox from my customers every day.
China’s factories have “deplorable working conditions,” a customer wrote to tell us last week. And he said that we were only taken to “places that we’re allowed to see.”
His views might represent the average American’s views on China… But what is this, 1990?
I’m certain this subscriber has never been to China.
Saying that we were “only taken to places that we’re allowed to see” is laughable. Nobody stopped me from going anywhere in Beijing… It’s like being in a big city anywhere, but more modern. Being in Beijing feels like being in New York City. But cleaner. And safer. And more futuristic.
(When I say stuff like this, my wife tells me to be careful or I’ll sound anti-American. I’m not trying to sound anti-American at all… I’m just reporting the reality.)
And the factories? Again, what is this, 1990?
Buying an apartment in Beijing will cost you over a million dollars today. It will cost you even more in Shanghai… and even more than that in Hong Kong. (These aren’t fancy apartments with great views, either – the real estate is just that expensive.)
Think about it… With a cost of living like that, China can no longer possibly be the low-cost manufacturing hub of the world.
China’s days of being the “sweatshop to the world” are over…
China can’t compete at all on price with Vietnam and Bangladesh, for example. When I visited a dress-shirt factory in Shenzhen, China, they told me it’s 90% cheaper to make shirts in Bangladesh. That was three years ago.
China can’t compete in manufacturing. It has to find something else to do. And it has.
China’s service sector now makes up a higher percentage of the economy than manufacturing, much like in America.
Meanwhile, I’ve visited factories in China many times since my first visit in 1996… Even back then, the difference between reality and perception was shocking.
I visited the Konka Electronics factory in 1996. If I recall correctly, Konka’s assembly line for TVs was German-designed. The workers wore lab coats and uniforms, and it was so clean you could have eaten off the floors.
As for the living conditions… Yes, the factory workers lived in dorms at Konka… worked at least six days a week… ate in a cafeteria… and shared bathrooms. The thing is, they were happy to earn dramatically more money in the city than out in the countryside. And, again, that was the reality for many Chinese people 20 years ago.
Today’s China is quite different… China has moved beyond most Americans’ perceptions. It’s the nation’s grand experiment… to move hundreds of millions of people out of rural areas and into higher-value jobs in new cities, built from nothing.
The U.S. has 10 cities with populations of more than a million… China now has over 100 cities with more than a million residents.
Where does a new city of millions of people come from? On this trip to China, my friend Brendan Ahern of asset-management firm KraneShares went to find out…
Xiongan: The Next Pudong
Turning a Wheat Field Into a World-Class City
Ahern left me in Beijing and drove 160 kilometers – just to get a picture in an empty wheat field.
So… what’s so important about that wheat field?
“I’m standing exactly where China’s President Xi Jinping stood a couple months ago,” he explained. “This very spot will be the center of town of the Xiongan New Area. Five million people will live here – very soon.”
“Xiongan New Area” will be a special economic zone – like Shenzhen and Pudong before it.
These “New Area” zones are unique areas where foreigners don’t need permission to do business or invest. China creates them to encourage economic development. It works…
Shenzhen had 30,000 people in 1979. Then it became China’s first New Area. Today, more than 20 million people live in or near Shenzhen.
Pudong New Area was China’s second such zone. As I described at the beginning, I can personally confirm it went from nothing to having possibly the most futuristic skyline of anywhere on the planet.
The U.S. has 10 cities with populations of more than a million… China now has over 100 cities with more than a million residents.
“Steve, I remember your stories about visiting Pudong over 20 years ago. I remember your stories of your biggest investing mistake,” Brendan told me before he went to Xiongan. “I wanted to have a before-and-after photo standing in the same spot.”
Xiongan will be China’s third New Area. President Xi has big dreams for Xiongan. He said Xiongan should be an “internationally first-class, green, modern, and smart city,” and it should set an example of good public services and economic openness.
For more than 20 years, the “experts” have said it’s crazy that China builds cities without people in them, just expecting residents to move there. At first, I listened to them. Now I don’t. I just want to be on board – invested in China. And there’s a great reason to be on board over the next five years…
The Day We’ve Been Waiting for Is Arriving in June 2018
Hundreds of billions of dollars will ultimately flow into Chinese stocks… and the money will start to flow in mid-June 2018.
This may be the biggest story of my quarter-century career in the markets.
In short, in June 2018, the world’s largest stock index provider (MSCI) will start including local Chinese stocks in its global stock indexes. When that happens, investment funds that track those indexes will have to start including Chinese stocks in their holdings. Here’s why it’s a big deal…
Around $2 trillion in investment funds track the MSCI Emerging Markets Index. And that’s just one index. Over time, hundreds of billions of dollars will be forced into Chinese stocks once the country is included in international stock indexes.
The simple reason why so much money will flow in is: China is the world’s second-largest economy and it’s the world’s second-largest stock market (behind only the U.S).
Leaving China out of a global index of stocks is like leaving Apple out of an index of mobile-phone software… It doesn’t make sense. Apple’s iOS is second behind Google’s Android software.
This is clearly a wrong that needed to be righted.
Nobody is paying attention to local Chinese A-shares – yet. Hundreds of percent gains are truly possible – in a relatively short period of time. I’m not kidding…
One trillion dollars – or more – should flow into Chinese stocks and bonds in the next five to seven years. This will happen whether it’s a good idea or not to invest in China – as global fund managers are forced to mimic their benchmark indexes. These benchmark global indexes will include China A-shares for the first time starting in June of 2018.
Global fund managers are ramping up their presence in China, aiming to be well ahead of June 2018.
Private investment-management firm Neuberger Berman plans to relocate its Chinese equity research shop from Hong Kong to mainland China, according to Reuters. And 20-plus global managers have set up investment subsidiaries in China – including Fidelity, Vanguard, and Allianz.
These folks are behind the curve. They haven’t focused on China. At least not well enough. But they must now…
Now Is Your Best Moment to Profit
Hundreds of billions of dollars will flow into local China “A” shares – as opposed to the shares that trade in Hong Kong – over the next five to seven years.
My recommendation is, get your money there first.
Nobody is paying attention to local Chinese A-shares – yet. Hundreds of percent gains are truly possible – in a relatively short period of time. I’m not kidding…
Here’s how… Chinese stocks have soared by more than 100% three separate times in the last 12 years.
The local Chinese investors can get euphoric very quickly. When the gains happen, they typically happen fast. Based on history, once the markets get moving, the bulk of the gains happens within 12 months. You want to be there early – like now!
So how do we best take advantage of the big opportunity in China?
It’s difficult for Americans to buy China A-shares directly. The simplest way for us to invest is through an exchange-traded fund that tracks China’s A-shares.
Your best option, in my opinion, is the KraneShares Bosera MSCI China A Share Fund (NYSE: KBA). KraneShares is a rare U.S. firm that actually focuses on China-based investments.
This is the optimal moment to buy into Chinese A-shares…
Hundreds of percent gains are possible. Hundreds of billions of dollars are about to flow in.
My advice? Get your money there first.
This trade could lead to – in all seriousness – some of the biggest gains of your life.
Throughout his career, Dr. Steve Sjuggerud has addressed hundreds of financial conferences in the U.S. and around the world, including at the New York Stock Exchange. He has also appeared in the media, including Bloomberg, Fox Business News, the Wall Street Journal, and Forbes. Steve holds a doctorate in finance and has worked as a stockbroker, vice president of a $50 million global mutual fund, and a hedge-fund manager.
Steve is editor of True Wealth, an investment advisory that specializes in safe, unique alternative investments overlooked by Wall Street. He recommends opportunities based on the simple idea that you don’t have to take big risks to make big returns.
His subscribers have made significant gains following his advice on China and Chinese stocks. If you’d like to take control of your investing and get recommendations each month about the best stocks to buy, learn more about joining True Wealth by clicking here.
