Churchouse Letter
February 2014         by Peter Churchouse

Can’t Eat. Can’t Drink. Can’t Breathe

The Chinese character for “crisis” is very close to the one that represents “opportunity.” It’s fitting. Right when the panic gets to its worst, it’s time to seize the moment.

The crisis I’m talking about in China strikes at the very core of human existence. It’s also the germ of some of the best investment ideas to lay in place now. When the crisis strikes, you want to be ready to take your chance.

There were 20 people around the table when the grubs were served. Granted, they had five-spice powder on them. The grubs, not the people. But they still didn’t look that appetizing. Neither did the locusts next to them.

We had just won a big deal to take a company public, so we were in celebratory mood. The insect "delights" on offer made me feel like I was being tested, and I wasn’t about to let the side down. So I piled a few on my plate and pushed them down.

The other Western guests refrained. So too did all the Chinese people around the table. Bearing in mind the flavour, I don’t blame them. I’m pretty sure, though, that I won a few points for having good “taste.”

Chinese food has as many varieties as there are provinces, as many secret recipes as there are cooks in a nation of 1.3 billion. I’m a big fan. And it’s food that links and drives us all. It just depends on your ingredients. A breadwinner in the West is an “iron rice bowl” in the East.

The iron rice bowl in China is close to breaking. The drinking glass is starting to crack. And, with foul air in their mouths, people are starting to gag.

China faces many potential crises. But there are three in particular that are already creating plenty of discord. They are leading to demonstrations that the central government doesn’t want you to hear about – let alone its own people.

The government is alert to the threat. And it’s starting to do something about it. Its actions promise to transform Chinese society, and with that the companies that serve it.

We all have our basic needs. Right now, in modern China, many of them aren’t being fulfilled, at least in a way that people trust. Fail to ladle the right rice into that bowl, and the current Chinese state could come down.

Enjoy the issue,

Peter


Ensuring Basic Resources in China

I’ve lived in China for nearly 34 years by now. After many a great meal, and a few banquets that have undoubtedly accounted for a belt notch or two over the years, I’ve come to have a great love of all the vast varieties of what’s so often simply slapped with the label “Chinese food” in the West.

I’ve tried just about everything. In fact, I’m pretty sure Chinese people enjoy testing visiting Westerners by offering them more and more unusual food to see when they will buckle. After winning an IPO deal several years ago, the company hosted us for a large lunch, with deep-fried locusts and ground grubs fried in five-spice powder on the table. I was not about to let the side down, piled a few of each on my plate and pushed it down. My colleagues skirted those “delicacies,” but not a single Chinese person around the table touched them either. I’m still not sure if I lost or gained face …

From the spicy hotpots of Sichuan to the lamb delights of far-western Xinjiang, and back to the southern seafood of Cantonese cuisine, there are as many kinds of Chinese food as there are dialects of the Chinese language. I forgot to mention the scalding siu lom bau of Shanghai and the oyster pancakes of Chiu Chow.

Chinese food, done the right way, is some of the healthiest in the world. Bak choi with garlic is a simple and delicious dish. Dao miu, or snow-pea shoots, are wonderful when in season. Steamed fish with sesame oil and soy is a personal favourite.

The sad part is that, when our family goes to the grocery store, we steer clear of anything with the “Made in China” label. In fact, we make great efforts to avoid buying anything from across the Hong Kong border. Most of our friends do likewise. Why? Because our trust in the quality of food supplied from across the border has evaporated.

As the recent scandal over horse meat in Europe has shown, food from the West can also have its issues. But they are typically far less serious than the outright deception or life-threatening fraud you’ll find in China.

And it’s not just food that’s the problem, as anyone who has choked through the brown air in Beijing or bought bottled water in a Chinese backwater will tell you. The basic ingredients of life, in China, can take it away.

I want to share with you how to turn that insight into a profit.

China today is facing a crisis. A crisis of its own making. It is not a crisis of finance, although there are certainly dark clouds on that horizon. It is not a crisis of economic growth. It is not a political crisis. It is not a crisis of terrorism or civil unrest.

But today's crisis threatens to cascade into all those others if solutions aren’t found, and found quickly.

The Chinese character for “crisis” is close to that representing “opportunity”. And as many of history's great business leaders and wealthy families have realised for generations, any crisis presents opportunities. Opportunities for the bold and those with a bit of cash to point in the right direction.

And that’s how it is in China right now.

The crisis I’m talking about in China strikes at the very core of human existence. You might be familiar with Maslow’s “hierarchy of needs,” a theory proposed by Abraham Maslow in his 1943 paper A Theory of Human Motivation. These human “needs” are often portrayed as a pyramid, with mankind’s core physiological needs at the bottom, our most fundamental requirements for survival.

These needs include food, water and air. In each one of these areas China is facing disastrous conditions in terms of adequacy of supply, safety and quality of the actual consumable materials, and security of future supply.

The global press regales us with stories of how China has economically leapfrogged the developing world in the last 30 years with economic growth that the modern world has never seen before. China is the poster child of economic success and social transformation. Now it’s got its sights set on the developed world China now stands as the second-largest economy in the world behind the United States.

I have been fortunate enough to witness and participate, in a small way at least, in this transformation. This has taught me a great deal about a whole range of subjects, things that I never foresaw. It has been an enjoyable, though hectic, ride, and a profitable ride for a great many people in China and Asia.

The crisis China now faces threatens not just to slow this economic miracle down, but to grind it to a halt.

When a population can no longer trust the safety of the food they feed their family, when they do not have safe water to drink, and what is available is poisoning them…. when the air they breathe is suffocating, causing cancers and other diseases – then unrest is not far behind. Already there are literally thousands of protests and riots around China every year focused on those issues at the local level. Given China's tightly controlled press, these eruptions of discontent are not widely reported. But word does get out. Images, too. Even the Chinese state can’t withstand the power of the Internet and social media.

The Facts Are Scary...

Let’s get down to brass tacks. The statistics and facts are worrying. We are not in the business of scaremongering, but the scale of these problems is such that we believe that the Chinese authorities have no option but to tackle them, and quickly. The good news is, they seem willing to do so.

While that is happening, there will be large- and small-scale opportunities for companies, individuals and investors to capitalise on the changes necessary to address these problems.

The topic of food, water and air pollution is vast. This is a subject that encapsulates Chinese history, government policy, the media, corruption, wealth, geography, and agriculture … you can come at this from many angles.

Anyone who reads the financial press even occasionally will be aware of China’s forays into commodities markets around the world. The goal is to secure supplies of energy, metals and minerals to underpin its manufacturing base. The next step is into the field of food, and increasingly in water. The high profile example of the Chinese acquisition of Smithfield Foods, the largest pork producer in the world, grabbed a lot of headlines, and is just one example. Away from the limelight there are numerous examples of very much smaller food- and agriculture-oriented transactions and takeovers involving Chinese individuals and companies all over the world…



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