Robert Hsu China Stock Strategy

Chinese exports to the U.S. have been causing quite a stir lately--their poor quality has been all over the news. It started with pet food and moved on to fish, toys and toothpaste. As an expert on China's economic development and someone who has witnessed this problem firsthand, I want to discuss what this situation means for trade between the U.S. and China.

Chinese food safety is a serious concern. When you're standing in the heart of modern Shanghai and looking up at impressive skyscrapers and meeting well-educated businesspeople, it's hard to believe that you have to remember not to drink the water. Whenever I visit China, I'm careful to drink bottled water and avoid eating uncooked food.

But this is not just my American bias--sophisticated Chinese consumers, especially Chuppies (what I call middle- to upper-class Chinese), are increasingly becoming aware of this problem as well. Many Chuppies have changed their eating and drinking habits in order to prevent illness. Most Chinese I know will only buy processed food from a few select companies with trusted brand names.

A Global Problem

It may seem like China is the problem with its contaminated shipments and poor quality standards, but that's not the case. The tainted food story involves a combination of lax food safety standards in China, unscrupulous Chinese suppliers and mediocre inspections by U.S. distributors.

Because there are so many people involved in the trade of tainted food, there is no one country or agency to blame when it comes to this problem. Everyone is dealing in massive quantities of goods, and it's only possible to inspect a small portion of what is coming into the U.S. And before we get too far ahead of ourselves, the U.S. isn't the poster child for safe exports, either.

About two weeks ago, Chinese inspectors seized a shipment of U.S.-made orange pulp and dried apricots. Why? Because the fruit showed high levels of bacteria, mold and sulfur dioxide. The orange pulp and apricots came from a plant in California and were quarantined in the eastern province of Shandong and the southern province of Shenzhen.

This isn't the first time tainted food found its way from the U.S. into China. Just last month, several U.S. shipments were destroyed on Chinese docks because they contained health supplements and raisins that didn't meet safety standards. So, as you can see, the problem goes both ways. The truth is that wherever there's trade, there exists the possibility of faulty equipment, low-quality products or contaminated food.

So next time you reach for that newspaper or turn on the evening news, it's important to keep the contaminated imports issue in perspective.

It's been a whirlwind week! Yesterday, I took a 24-hour business trip to Vancouver, Canada. I just got back to Los Angeles about an hour ago, and later today I will head out again -- this time to China for a two-week visit.

I'm thrilled to be returning to China. While I'm there, I'll be meeting up with my China Investment Tour group. And of course, I'll be doing research for my newsletters, China Strategy and Asia Edge by investigating the unprecedented wealth creation taking place in Asia today.

My schedule is jam-packed full of educational and exciting events. My first stop will be in Taipei, where I'll meet up with my wife, Yvonne, and our kids, who have already been in Taiwan for a couple of weeks.

Then we'll be off to Shanghai, where Yvonne and I will host a welcome dinner for our China Investment Tour group. While in Shanghai, I'll also meet with the Vice Chairman of Shanghai's Chamber of Commerce, my friend Gou Man-yuen. Mr. Gou is a successful real estate developer and multimillionaire investor with influential connections in both Beijing and Washington. He's a fan of China Strategy and has promised to share his insights on recent developments with China's newly minted multimillionaire entrepreneurs. We'll also talk about Gou's personal rags-to-riches story. I look forward to sharing our conversations with you.

After finishing up in Shanghai, I'll fly out to Shenzhen and have dinner with some of China's finest money managers. I plan to take advantage of our time together to talk about stocks, investing strategies and economic policies. The next day, I'll meet up with our tour group. We'll visit the top stock brokerage firm in Guangdong Province, China Merchants Securities, as well as the Shenzhen Stock Exchange. The brokerage firm will host a special dinner for our group and answer questions about China's recent stock market boom. I'll be sure to share the firm's analysis with you in upcoming Dispatches.

The next morning, our tour group and I will visit the headquarters of one of my biggest gainers--Mindray Medical (NYSE: MR). Since we have three medical doctors in our tour group, I expect the Mindray visit to be especially interesting. I plan to ask Mindray executives about the company's technological edge, its near-term growth plans, its foray into the U.S. market and developments in China's healthcare policies.

I'll be sure to fill you in on all the details of my trip and, if you're interested, you can find out more about me and my trip on my China Strategy web site.

It was hot and humid outside of the Shangri La Hotel in Shenzhen last night. The smog-choked air made every breath difficult. Crowds of migrant workers filled the sidewalks while cars zipped up and down the streets urgently.

My kids and I were on our way to an Italian restaurant for dinner. After one full week of eating nothing but Chinese food, my son Sean wanted some good old-fashioned spaghetti carbonara, and my local contacts in Shenzhen had told me about an obscure little Italian restaurant hidden near our hotel.

Despite the unpleasant conditions outside, there was a chaotic energy in the air. I wasn't the only one who could feel it--even the kids sensed the elevated energy buzzing about everywhere. All of the action, growth and ambition were easy to see. It's obvious that the people of Shenzhen want to get rich and are willing to do whatever it takes to achieve that goal.

If capitalism has a new frontier--a Wild West in the far East--Shenzhen would be it. Over the past 20 years, the former sleepy fishing village across the river from Hong Kong has became the greatest boomtown ever known to mankind. The city had less than 100,000 people about 25 years ago, but today it has a population close to 7 million, or nearly twice that of Chicago. The city also has a unique demographic structure compared with other major international cities--the average resident's age is only 29, and women outnumber men, which is a rarity in China.

Shenzhen got its big break in the early 1990s when China's former leader Deng Xiao-ping made a historic visit to the then-fishing village and designated the city as a special economic zone. The special economic zone status of Shenzhen gave the city's investors special tax breaks, and soon foreign investors from Hong Kong and Taiwan flocked to the zone in droves. Shenzhen has become an important economic center for China, and today it boasts the highest per capita GDP of all major cities in the country.

Yesterday, our China Investment Tour group visited Shenzhen-based China Merchant Securities, one of the top stock brokerage firms in Mainland China. We were treated to a presentation by the brokerage house's very bright research director, John Ho--an MBA from USC's Marshall School of Business and a former portfolio manager at Dutch financial giant ING Group.

John gave up a cushy job at ING and took a pay cut to join China Merchant Securities. A few years ago, it was almost unthinkable for someone to leave a major international financial institution to work for a local Mainland Chinese brokerage house. But today, with China's economic emergence and massive stock market boom, senior managers at top Chinese brokerage firms (like John) now have unprecedented opportunities to build wealth.

We learned a lot from John's presentation, such as the current high earnings growth rate of many A-share companies, the incredible run-up in Chinese brokerage stocks, and John's outlook on the global economy. I'm looking forward to sharing all of the details of our visit with John in the next issue of China Strategy, which I'm working on right now. I'll also tell you about our group's trip to the Shenzhen Stock Exchange and our visit to the headquarters of Mindray (NYSE: MR). It's been a very productive and informative trip so far, and I can't wait to share my findings with you, so stay tuned!

My trip to Asia has finally come to an end. After visiting five cities in just 13 days, I returned home to Los Angeles this morning. I had a good time and learned a great deal, and I can't wait to share my findings with you in the coming weeks.

Each of the major cities I visited has its own special significance. Here's a mini-tour that explains what makes each unique:

Shanghai is the biggest and most cosmopolitan city in all of Mainland China.

Shenzhen, which we talked about last week, is the ultimate boomtown, where more than 5 million Chinese have moved in search of better and brighter futures.

Hong Kong is China's portal to the West and a major international financial center.

Taipei is the cultural and information center of the Chinese world, with complete freedom of press, first-rate telecommunications infrastructure and the best Chinese bookstores on the planet.

Seoul is the entertainment capital of Asia and is a world-class city that's friendly to foreign visitors.

I'm going to sleep. We'll talk again soon.