Investing in China - Don't get eaten by the Dragon!
By Eunice Luis
Published in Port Credit Harbour Lights
When did you last buy something made in China? Chances are it wasn't long ago. Have you ever wondered who is profiting from this huge economic boom?
With 1.2 billion people the Chinese economy grew by 9% last year, fueled by exports and growing consumer demand. In 1990 they lead the world in the production of low value cotton and textiles. By 2002 they moved up the value chain, adding refrigerators, cameras, motorbikes, PC's, DVD players, bikes, and cell phones. Because of this wages and disposable income are increasing, with 90% of urban Chinese now owning a home.
Their demand is driving up worldwide prices for commodities like iron ore, oil, and pulp and paper. They produce more steel than the U.S. and Japan combined. According to James Morton, Manager, Mackenzie Cundill Recovery Fund, "There is no question that China is the World's economic powerhouse in the making".
How can you participate in this phenomenal growth?
First, you can make a direct investment through a mutual fund focusing in China or the "Greater China Region" (China, Taiwan, and Hong Kong). Second, you can participate indirectly by investing in companies which will benefit from increasing domestic growth, regional trade, or outsourcing of manufacturing.
For example, Proctor and Gamble's Oil of Olay cosmetic line is now the most heavily advertised brand in China, with a 25% sales growth in the third quarter of 2003 and in 2002, 45% of Intel's sales were to the Asia region. Finally, you can invest in commodity and natural resource companies which will benefit from higher prices or sales volumes.
What are the risks?
First, there is political uncertainty. To date, China's move towards capitalism has not threatened the supremacy of the Chinese Communist Party. In fact they have recently discussed changes to the constitution to grant greater legal protection to private enterprise.
And then there are the exchange rate and U.S. protectionism. The low fixed value of China's yuan makes exports cheap, but will ultimately offend importing countries like the U.S. Similar to Japan in the 1980's, the exchange rate will eventually have to increase.
Finally there are potential domestic issues like the huge disparity between the wealth of urban and rural citizens, bad debt problems in the banking sector resulting from rapid growth, and potential manufacturing overcapacity.
For more information attend our free "Investing in China" seminar featuring Daniel McCormick of Dynamic Mutual Funds on May 18, 2004. Contact Eunice Luis at Portlington Financial Group (905) 274-7820
