Wealth Mobility in China

Robert Hsu, August 01, 2007

One of the most startling transformations in China during the past decade has been the incredible wealth creation that's taking place there. Over the past 10 years, more than 200 million Chinese went from living on less than $2 a day to being able to eat out at a mid-priced restaurant at least once a week.

On this visit to China, I wanted to observe firsthand the impact of the vast wealth creation and social upward mobility in the country. The two-year 300% run-up in the Mainland Chinese stock market and the five-year 200% run-up in many urban property markets have created enormous wealth for millions of Chinese.

During my time in China, I talked to three people who personify the kind of prosperity that's becoming more common on the Mainland. I'd like to share their personal stories with you. Their ambition and success are inspiring, and their stories show just how powerful the China Miracle has become in recent years.

Frances' Story:
The Rise of the Chuppies

The wealth creation in China is most noticeable amongst Chuppies -- young, well-educated Chinese professionals living in large coastal cities. Through a combination of savings, hard work and good investments, millions of Chuppies under 30 have already amassed assets of $100,000 on incomes of less than $2,000 a month. By contrast, many young Americans make more than twice that amount but have a tough time building a financial nest egg.

Frances, the consumer trends analyst for China Strategy, is a typical Chuppie living in Shanghai today. Like millions of others living in Shanghai, she originally came from another part of China. A native of Wuhan in central China, Frances moved to Shanghai after college six years ago and found a job in the city.

Her first job as an account representative at a state-owned dairy company paid only $3,000 a year. Eager to improve her situation, Frances found a new position working as an account executive at a public relations firm that handles promotional events for several prominent French luxury product lines, such as Chanel and Remy Martin. Her income doubled with the new job, and she gained exposure to a high-end clientele in Shanghai as well as many high-end luxury goods.

Unlike most other young women in similar positions, instead of spending her money on luxury designer goods, Frances saved her money to buy a condominium. She bought a small condo three years ago for $40,000, and moved her mother from Wuhan to Shanghai to live with her. Today, her condo is worth more than $55,000.

After working in public relations for two years, Frances found a better-paying opportunity with the Texas-based cosmetics company Mary Kay International. Mary Kay has a sales force of 320,000 in China, and Frances worked at China's corporate headquarters as a communication executive for the sales reps. She travels often to different provinces throughout China and communicates constantly with the pink army of Mary Kay sales reps. By now, Frances is making more than $10,000 a year, which is in the top quartile of earners in Mainland China.

I met Frances two years ago in Shanghai and was very impressed by her knowledge of a variety of consumer trends. I hired her to contribute to our boots-on- the-ground team of researchers because of her constant contact with ambitious young Chinese women throughout the country. Frances helps us keep a pulse on what (and where) women are buying. In fact, her observations helped lead us to two companies, both of which have become successful thanks to shifts in China's popular culture.

In addition to being a successful professional, Frances is also a successful investor. She characterizes herself as a conservative investor and says she is concerned about the high valuation in Shanghai's A-Share market. Nevertheless, she has a portion of her liquid net worth in Chinese domestic mutual funds, which have done well. She also dabbles in currency speculation and has made some nice gains in that area. As a result, at the young age of 28, Frances has managed to build a nest egg of approximately $100,000 on an annual income below $20,000.

Mr. Kou's Story:
The Rise of Pudong
Frances's story is a good example of a broader phenomenon: Many Chinese businesspeople who are successful often invest in securities and real estate.

Stocks and real estate are two of the biggest wealth-creating opportunities for hundreds of millions of Chinese entrepreneurs. For instance, our friend Zhu Jun -- the dynamic founder and chairman of our online gaming company The9 -- is a significant player in Shanghai's real estate market. In fact, more Chinese centi-millionaires and billionaires have made their fortunes from real estate than any other industry.

A couple of weeks ago, I visited my friend Kou Men-yuen, the chairman and founder of Gold Taiyuan Group, a wildly successful real estate development company. Mr. Kou's story shows how China's thriving real estate market has created vast fortunes.

With a personal net worth of more than $300 million, Mr. Kou is a leading real estate developer in the Pudong area of Shanghai. Pudong, officially known as Pudong New Area, is the newer half of the world's fastest-growing major city.

Once a rural stretch of farmland, Pudong sits across the Huangpu River from the older, established sections of Shanghai in Puxi. As recently as 15 years ago, Pudong was still mostly weeds and swampland. In the early 1990s, ex-Shanghai mayor Jiang Zhe-min became China's president and decided to restore Shanghai to its former pre-World War II glory.

In order to raise Shanghai's profile, Jiang set in motion a new policy that turned the Pudong area into a Special Economic Zone. The Chinese government worked hard to transform Pudong into China's version of Manhattan, and by the mid-'90s, 30% of the world's construction cranes were located in Pudong, helping the booming district build out its infrastructure.

The story of how my friend Kou became a centi-millionaire mirrors the emergence of Pudong. A native of Pudong when it was still mostly rural farmland, Mr. Kou moved to Hong Kong during the early 1980s. At a time when Mainland China had a shortage of goods, Kou started his own import–export firm, earning huge profit margins. By the late '80s, he had made a fortune and decided to enter the furniture manufacturing business in order to take advantage of China's cheap labor.

When Jiang decided to make Pudong China's financial center, Kou was ready to invest heavily in his hometown. Because he knew the local officials and the geography of Pudong better than other developers, Kou was able to buy large tracts of land at prime locations without paying a lot. His real estate empire grew right alongside of Pudong's emergence.

In 2001, Mr. Kou made a very smart move: He built a residential complex, called Xiang Mei Garden, across the street from Shanghai's biggest park. The complex contains more than 2,200 high-rise condominiums with plenty of greenery and recreation space. The units sold well because of the complex's excellent location and design. Xiang Mei Garden's success catapulted my friend into the ranks of China's super-rich.

Kou owes his success to two major factors. First, he had overseas connections that helped him get his Pudong projects off the ground. He used resources and initial capital from Hong Kong to start building in Pudong. (Many other Chinese entrepreneurs we invest with here at China Strategy also had strong overseas connections when they started. Zhu Jun of The9 made his first million from doing business with U.S. companies. Shi Zhengrong of Suntech Power (NYSE: STP) is an Australian citizen who was trained at the University of New South Wales. And the founders of Ctrip and Home Inns (NASDAQ: HMIN) were all educated in the U.S. Back in the 1990s, before China's economy really took off, it was a huge advantage to have international know-how.)

And secondly, in addition to his foreign connections, Kou also had local knowledge of Pudong. Many foreign investors who moved into Pudong during the 1990s went bust. But because Kou was originally from Pudong and had superior local connections and knowledge, he was able to thrive where others failed. The combination of foreign resources and local knowledge was crucial to Mr. Kou's success.

Even though Kou is already very rich, I believe that he'll continue to be successful. He's at the right place at the right time doing the right thing, and as China continues to grow, so will Mr. Kou's fortune.

Mr. Fu's Story:
The Rise of China's Millionaires

Only three years ago, Chinese millionaires (measured in U.S. dollars) were quite rare, but nowadays in first-tier cities like Shanghai and Shenzhen, millionaires are a dime a dozen.

Of course, $1 million today isn't what it used to be, but as recently as 25 years ago, anyone with $1,000 was considered wealthy in China.

A Taiwanese friend of my family's, Mr. Fu, became a millionaire from Taiwan's stock and real estate boom during the late 1980s and early '90s. The story of how he met his wife shows how the wealth creation in China has changed the balance of power in relationships between Mainland Chinese and expatriates living in places like Hong Kong, Taiwan and the U.S.

As Americans, we don't usually associate marriage with power. We tend to believe that the bulk of society marries for love, and that only a small portion of people marry for money or status. In China, the perception of marriage and the practice of it are a bit different.

For example, about eight years ago in Taipei, I had dinner with Mr. Fu, who had recently married a very attractive young lady. At the time, Fu was a plain-looking man in his early 40s who had a modest personal fortune of about $5 million or so.

In 1994, Fu moved to Beijing and met his future wife at Beijing University -- China's version of Harvard. Back then, a $5 million man in Mainland China was very impressive, even in major cities like Beijing and Shanghai. Although Fu was nearly 20 years older than his girlfriend, he showered her with gifts from Louis Vuitton, Chanel and Gucci. After five years of aggressive courtship, she married him.

During our dinner, Fu told me that he was lucky to have met his wife back in 1994. He believes that if he met her in 1999, he would have had a tough time getting a woman of her caliber to marry a man like him, who is 20 years her senior.

"Why is that the case?" I asked.

Mr. Fu told me that the times had changed. China's first group of young sea turtles (or Chinese expatriates living abroad) -- many of whom are princelings -- had returned to Beijing during the mid-'90s. These sea turtles have started their own companies, and they're rapidly becoming very successful. The most attractive and intelligent women from Beijing University are dating these men, and Mr. Fu said that nowadays he'd be considered too old to compete with them.

"Don't you have a financial advantage?" I asked.

Mr. Fu explained that any economic advantage he used to have has since disappeared. There are a lot of smart young men with good family connections in Beijing now. Although many of them are still not rich or established just yet, it's only a matter of time before they become prosperous.

Middle-aged Taiwanese and Hong Kong men with Mr. Fu's type of fortune -- affluent but not super-rich -- are becoming more common these days. As a result, Chinese women would rather date young locals with bright futures.

My conversation with Fu revealed an important shift in how Chinese think about the outside world. In the past, foreigners like Mr. Fu were considered the wealthiest and most successful people in China. But now that the China Miracle is well under way, the Chinese are recognizing their own potential. I believe this awareness will help give China's people the confidence and drive to continue making great economic strides for years to come.

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