With Deng Xiaoping’s vision being realized by the 1980’s with infrastructure in place and foreign investment normalized, the next step was about to be taken. In the mid 80’s the Shanghai currency exchange was put into place. It was rudimentary to say the least. It was open to foreign concerns every Thursday. The purpose was to exchange RMB for foreign currency. Companies like AMC who had opened plants and were selling products in China had no other way to realize their profits in foreign currency. The RMB was still a non-tradable currency.

The exchange was simple; foreigners would come and bid on foreign currency made available to the exchange by Bank of China, Shanghai Investment and Trust Corporation and other Chinese entities interested in buying RMB at a discount. It was a slow and tedious way for foreign investors trying to break into the still yet non-existent Chinese consumer market to exchange local currency. The cost to the foreign enterprise was generally around 10 to 12 % much more costly than the 40% currency profits which could be seen on the black market. This was a real problem to the Chinese so strict enforcement began concerning the sale of currency on the black market which was quickly becoming an all too gray market.

At that time a foreign investor could reap tremendous profits if they knew the system. An example of this would be if an investor was to build a factory on a piece of land with a 1 million square feet foot print. Assume construction costs were USD$70 million. If a local contractor was hired to build they could be induced to put the contract in RMB but would be paid in dollars at a 40% discount. This would bring actual construction costs to USD $42 million. At that time land in China was valued at $300 per square meter, if it were developed, so a million square feet would be valued at approximately USD 30 million. When the project was completed the building and land would have a value of USD$100 million with an actual construction cost of USD$42 million. The Bank of China, at that time, would offer a mortgage of 70% of total land and building , in this case USD$70 million. The net effect to the investor was a construction profit of USD$28 million before they started their enterprise.

The mid eighties were like the Wild West in China for the astute investor. It was very specialized and you had to be knowledgeable in doing business there but it was extremely profitable for some.

This type of profiteering stopped abruptly in 1989 with the Tiananmen Square Incident. China came very close to a civil war. The incident was mis-reported by many American news casters who did not have all the facts. That was not their fault; the Chinese were very secretive about this.

At that time Taiwan was holding public elections and Lee had just been voted in. He had been an educator and many in Taiwan viewed him as weak. When a straw poll was taken and it overwhelmingly showed the Taiwanese would vote to go back under the sovereignty of China, the old guard of Taiwan panicked. It was thought that this led them to send operatives to China to cause some insurrection to frighten the Taiwanese people and keep them from ever going back under Chinese Sovereignty.

Several months prior to the incident two ships whose bill of ladings showed Agricultural Equipment landed in Chinese ports and it was discovered that they were in fact loaded with arms. I do not know if the incidents were related but it caused one to think.

The main problem for Deng during the Tiananmen Square protests was the Northern Army which was headquartered in Beijing refused to intervene. It is unknown by me if they were aware of the Taiwanese presence.  Deng had to respond quickly and called troops from Chengdu.  This was a very tense situation because as they approached Beijing, it was thought, the Northern army might try to stop their entry into Beijing.

Deng had sent a message to the Western Army to lock all of their weapons in duffle bags and for the soldiers to suppress the people in the square unarmed. The Northern Army was then notified that the Army from Chengdu was coming into the city unarmed, and in fact they did, the Northern Army stood down. The soldiers from Chengdu arrived in the square in busses and the first two buses were stopped by the civilians and set on fire. Over 80 soldiers were killed. The next bus on site was overtaken and the soldiers were hung around the square. The violence which ensued over the next day’s certainly had a debilitating effect of foreign investment. Deng stepped down but would return the following year.

I believe that China’s want of having Taiwan back under its sovereignty kept this information from being leaked at the time and forced China not to treat this as an act of aggression.

Many American investors pulled out but the void was quickly filled by the Europeans. American investors came back strong after normalcy returned to China and the demand for consumer goods in the U.S. rose. The interesting thing about the relationship between China and foreigners is that China has never been truly fond of foreigners but with that said, they like Americans above all. The United States is one of the few Countries which never tried to colonize China.

By 1990 the Chinese economy was again booming and the formation of the Shanghai Stock Exchange was announced. The immediate success of the exchange was, in my view, due largely to an American entrepreneur. I will go into this in depth in the next installment.

Goldman Sachs just awarded a $50 billion valuation to Facebook. And in a shrewd branding maneuver, the storied financial behemoth is offering its high-net-worth clients the option to co-invest in the world’s leading social media site.

Is the investment opportunity exclusive? Absolutely. Will there be a fee? You bet.

Before investors jump in with their big boots, however, I encourage them to review the groundbreaking analysis—which I unearthed over at Herding Cats. This chart debunks the $50 billion valuation and even suggests some New Year’s resolutions if you’re late to the 2011 party.

Click on the picture below to hear the sweet sound of rising markets.