What Hong Kong Tells Us About China

By Eric Jackson, Senior Contributor

03/24/10 - 06:00 AM EDT

Stock quotes in this article: UTA , ONP , PUDA , SHE , CWS , CAGC , CHBT , FUQI

HONG KONG (TheStreet) - I've spent the last couple of days in Hong Kong, the gateway to the Orient. Starting Thursday, I will embark on a 10-day trip in China meeting with different management teams from existing portfolio companies and prospective investments.

The companies include Universal Travel(UTA), Orient Paper(ONP),China Agritech(CAGC), Puda Coal(PUDA), Shengkai Innovations(SHE), China-Biotics(CHBT), China Wind Systems(CWS), and Fuqi International(FUQI).

The time in Hong Kong has opened my eyes to some of the dynamics going on in this city's economy and its relationship to mainland China, which are useful for any investor to keep in mind.

Hong Kong is booming at the moment. Recession? What recession? Any American looking to board a time machine and travel back to the glory days on 2006 should take the next flight to this city.

If you've grown weary about hearing the latest Case-Shiller data on housing and how foreclosures are about to start increasing again, you might find it jarring to walk around Hong Kong and read posters on real estate agency windows advertising dark and dirty 1,600 square- foot apartments going for $3 million to $4 million.

Everywhere you go, you see advertisements for some new extravagant condo building being built. People here like to demonstrate their prosperity, often by wearing high-end brands proudly. On a stroll last night through a prosperous section of Kowloon, I was startled to see a line to get into the biggest Louis Vuitton shop I've ever seen. Yes, there was a line of people waiting to get into a store so they could spend $10,000 to buy a bag.

I now understand why Vancouver and Toronto are experiencing mini-housing bubbles at the moment: People from Hong Kong are going up there to scoop up investment properties at a fraction of the price they would pay here.

This real estate boom is driven by the constricted supply of housing on the small island, the low marginal tax rate of 15% (how's that for a mortgage tax deduction?), and most importantly, newly wealthy mainland Chinese teeming over the border every day eager to spend their money in Hong Kong.

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