Profiting from the Police State
By Graham Summers 
September 10, 2007

China's in quite a quandary. 

It wants the rapid economic growth of a market-based economy. But at the same time, it wants to retain its iron clutch over its 1+ billion citizens. The government has already banned thousands of websites, including Wikipedia.

Few places illustrate this tension like Shenzhen. 

Shenzhen's economic growth has been staggering ever since the China's government set it up as its first Special Economic Zone (SEZ) in 1980. SEZs are business-friendly areas in China with tax benefits and other features to draw in foreign investment. The effects of these pro-business moves have been tremendous. 

Shenzhen has the highest per-capita GDP of any mainland China city. It's China's second-busiest port city after Shanghai, and ranked No.1 for export volume for the past 14 years. More than $30 billion in foreign investment has flowed into the city since 1980 - $3 billion came in last year alone. 

But if you think Shenzhen is a free city, you've got another think coming. 

Last month, China announced that it had installed more than 20,000 police cameras to monitor its citizens' activities. The city already has 180,000 closed-circuit television cameras owned by businesses and government agencies. Soon, the police will be able to link into that massive network too. 

The Orwellian situation isn't stopping there. The government plans to issue resident cards that will reveal work history, educational background, religion, ethnicity, police records, family records, credit history, subway travel... even their landlord's phone number. By scanning one of these cards, Chinese police will know everything there is to know about a given resident. 

The program is starting in Shenzhen but will spread. China is already issuing 150 million of these cards to citizens who have relocated but not yet sought "resident" status from their new city. 

These sorts of developments are a boon to security companies with branches established in mainland China. Spending on IT security in particular is expected to rise dramatically in the coming years. 

Chinese IT firms spend an average of 19% of their budget on security, compared to 12% for similar firms in the U.S. They spent $600 million on IT security in 2006. That figure should pass $1 billion by 2010. And as Internet penetration increases in China, it's only going to get higher.

China PC sales are forecast to hit $17 billion this year. Businesses aren't the only ones that need antivirus software and security. 

In other words, we're at the start of a massive boom in Chinese security spending. And just as we need to be aware of how to profit from the growth in China's commodity consumption, we need to be aware of companies that will profit from "security consumption." Several plays on this theme include Hi/fn, RSA Security, China Security & Surveillance Technology, and China Public Security Tech.

By no means are these recommendations to buy... but it's time to build a watch list here. There's big money to be made. Looks like I might be heading to China. 

Good trading,

Graham