Land Grabbing to Reshape Asia

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When the Americans took umbrage at a group of Japanese investors buying Rockefeller Center I don't think they would have been comforted by knowing that moments like that have happened the world over throughout history.  When one country builds a huge capital advantage it seeks to use that capital to find virgin land to continue expanding their economic reach.  Many of Japan’s biggest companies which are widely held by the iShares MSCI Japan Index ETF (NYSEMKT: EWJ) including Bridgestone and Panasonic, are developing relationships with Vietnam; doing this as a way for them to mitigate their debt and rising social costs.

New Kids Investing Abroad

At the same time, Vietnamese companies have a chance to flex their economic muscle in neighboring countries like Cambodia and Laos. Five Vietnamese banks, including Sacombank, have opened up branches in Cambodia in the past few years.  Cambodia, in particular is attractive for a number of reasons:

  1. Their income tax rate is around 20 percent, but offer additional incentives to attract foreign direct investments, which can include tax holidays of up to nine years.
  2. Cambodia allows for 100 percent foreign-owned business.
  3. They also allow full ownership of land, unlike Vietnam who only allows land leases. 
  4. The absence of price controls on both goods and services or restrictions on the repatriation of funds. 

As its economy expands, a nascent middle class with disposable income is growing and that middle class is saving in greater proportions.  China is the largest foreign investor in Cambodia, followed by South Korea and Malaysia and, now Vietnam. 

Vietnamese companies seeking to expand are increasingly looking west. Already more than 120 Vietnamese companies have a presence in Phnom Penh and bilateral trade between the two neighbors has grown on average 40 percent since 2004.  Trade now stands at $2.8 billion USD, increasing 54% in 2011 and the plan is for it to double by 2015 to $5 billion.  Hoang Anh Gia Lai Corporation, HAGL, a prominent conglomerate owns 51,000 hectares to expand its plantations.  HAGL is also heavily invested in Laos with more than $1 billion invested in the southern state of Attapeu where construction of an airport has just begun.  Similarly, Phuoc Hoa Rubber and Dong Phu Rubber, two of the leaders in Vietnam’s rubber industry, have 10,000 hectares each under their possession in Cambodia.

Both Sacombank and HAGL are major holdings of the Market Vectors Vietnam Index ETF (NYSEMKT: VNM), comprising nearly 11% of the funds’ AUM.  The ETF just took a major stake in Sacombank back in March after the bank’s merger with Eximbank and Asia Commercial Bank was resolved.  The ETF, along with the VN Index, has risen 45% year-to-date.  The fund is 44% exposed to financials which have performed very well as tight monetary policy has forced liquidations of weaker real estate developers and lenders.

Cambodia has opened up its potential for natural resource development up greatly, handing out more than 2,800,000 hectares in concessions to foreign investors for mineral, precious metals, agriculture since 2008.  When logging and forestry concessions have been added, concessions total nearly 38% of the country's area.

One of the effects of such a rapid opening up of Cambodia's land is, of course, dealing with displacing the local population, recent reports of projects owned by Chinese companies, like Tianjin Union Development Group(SEHK: 882), funded through the Asian Development Bank, improperly relocating people as infrastructure projects more forward abound.  Due to the very rudimentary infrastructure outside of the major cities, i.e. lack of water and electricity, this is the equivalent of destroying the local’s livelihood.  This is a common problem associated with growth in Southeast Asia and not at all specific to China.

Band of Brothers Sans Bullets

The necessary infrastructure projects are underway like the SKRL sections that will connect Phnom Penh with Ho Chi Minh City, Yangon and Bangkok. There is also the Kamchay dam, recently brought on line delivering up to 193 MW at peak capacity, and built by SinoHydro Corp. and financed completely by China.  The Kamchay dam will provide up to 65% of Cambodia’s power.  Cambodia has three other such dam projects that are all due to be completed by 2015.  These projects and others like the 2000+ km pipeline from the Bay of Bengal to Kunming, China being built by Petrochina (NYSE: PTR), are creating all new silk roads which transcend political borders.  It is pipelines like this and the one that crosses Kazakhstan from Ataryu to Alashankou that has given Petrochina the supply it needed to pass Exxon-Mobil as the largest producer and refiner or oil in the world with their latest earnings report.

Kazakhstan is the poster child for this trend.  Being landlocked the Kazakhs transport via pipeline most of the oil they produce along with the natural gas being produced by their neighbors in Turkmenistan and Uzbekistan. 

New commodity and transportation lines, i.e. pipelines and railways, are becoming the real borders of the world not the political divisions drawn by previous conquerors of a region.  The land-grabbing plans of China, using their burgeoning wealth to buy or lease the land that is valuable to them, as opposed to invading it militarily, is the new model.  In my estimation, this is a better one in which capital is allowed to appreciate as opposed to having first be destroyed in warfare and re-built afterwards.

With the coming integration of ASEAN into the Asian Economic Community (AEC) and the further strengthening of ties between those 10 nations and their biggest regional partners: Japan, China and South Korea this will function to transform a this area of the world into an economic powerhouse few have the foresight to understand no less invest in.


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