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Investment View From China: The Secret Path to Profits

Stock-Markets / China Economy May 09, 2008 - 12:01 PM GMT

By: Keith_Fitz-Gerald

Stock-Markets

Best Financial Markets Analysis ArticleBEIJING, CHINA - Whether you're trying to invest profitably in the region here, or are just trying to understand what's going on, there's a single secret that will virtually guarantee your long-term success.

And I'm going to tell you what that secret is.


Stop making the same mistake most Westerners make. Don't waste your time trying to figure out just where China will fit into our future. Instead, try and figure out where we will fit into theirs.

That's more than an exercise in semantics. Think of it more as an investment screen that will determine which countries from "our world" will advance enough to be relevant to China's future. Those are some of the companies that you'll want to go with - the companies that will profit "from" China without having to actually be Chinese companies.

The problem with trying to figure out where China's headed is that the changes are just too dramatic. I mean, 35 years ago China was like North Korea is today; 30 years ago it was like Cuba. Now it's like no place on the planet.

That's why the so-called "Panda bashers" - who view this as one huge economic train wreck that's just waiting to happen have got it all wrong.

Look, I'm not saying that there won't be challenges or corrections along the way - indeed, we've been experiencing just that over the past few months - but one visit here is all it takes for a person to fully understand that the proverbial genie is out of the bottle, and there's no putting it back.

The Big Buildup

The first thing you'll notice here is that China looks like one big construction zone. There hasn't been an infrastructure boom like this one anywhere on earth since the Marshall Plan reconstructed much of Europe after that region was devastated by World War II.

Everywhere you look you see piles of building materials - bricks, pipe, cable, wiring, lumber and glass (and that's merely a sampling) - just waiting to be installed in buildings all over this capital city. Some will renovate small family housing units in Beijing's ancient and narrow hutongs , while much of the rest will give life to the modern new high-rises reaching skyward from the construction sites arranged like chessboard squares in almost every key city here in China.

It seems like the entire country is going "up," which is why I was not surprised to hear from one of my local contacts that as many as 50% of the world's high gantry construction cranes are now being used in China.

The East Coast city of Shanghai - with its modern, almost-Western atmosphere - already has more than 4,000 skyscrapers; that's twice as many as New York City, and Shanghai has another 1,000 on the proverbial drawing board.

China's also going "out." And in every direction.

In the late 1980s, Beijing had only two beltway-style "ringed" highways encircling the city. Now it has six - to serve the 14.5 million people who live here.

Two decades from now, China will have more than 50,000 miles of freeways - more than our entire interstate system - and even that won't be enough.

Incomes are on the march. Everywhere I've been in recent days, I've seen my share of Gucci, Dior and Rolex - and not just the "knockoffs." As we've reported repeatedly, China's consumers are becoming more and more brand-conscious, especially in the first-tier cities like Beijing and Shanghai ( Money Morning editor Bill Patalon has dubbed this " The Baywatch Effect ," and only partly in jest), but also in second- and third-tier cities, as well.

The escalation in traffic has been breathtaking, simultaneously choking the roads and the pedestrians on the sidewalks. And it's only going to get worse.

In 20 years, China will have more cars on its roads at any one time than we do in our entire country, running or parked. At the moment, Beijing alone is adding 14,000 vehicles a day to its rolling roster.

If all these new cars were the small, economical, fuel-efficient cars you typically see in emerging economies, that would be one thing. But the growth in incomes and in wealth has enabled many China consumers to buy luxury cars, just as they buy luxury goods.

On this trip, shiny black Audi A6s ( at $43,000 to $73,000 a copy in the U.S. market, depending upon the model and options picked ) in particular seem to be ubiquitous. So are Buick sedans. I've even spotted a few Hummers.

If you look at several of these brands - Audi, Buick and Hummer - you'll get a poignant illustration of how well it pays off to become part of China's future, and the risks of waiting for that country to become part of yours.

Here's what I mean.

The "Secret" Pays Off

Let's first look at Audi. Some of the Audis are being built by a China operation managed by Volkswagen AG . VW became one of the first foreign companies to begin manufacturing facilities in China when it started operations there in 1982 . Audi AG and both VW long ago decided to make itself part of China's future - and now it's reaping the rewards. The German carmaker actually holds a 10% stake in the FAW-Volkswagen Automotive Co. Ltd. operation that produces the Audi cars in China. And  Audi just this week announced plans to expand its dealer network in China from the current 132 to 220 by 2012, underscoring again the importance it places on that market.

Hummers are appearing because they confer status on China's "new money crowd." If you have a Hummer, everyone knows you're successful. There's a real value in that in most societies - and China, where status is important, is certainly no different.

But Buicks? That one doesn't quite compute, yet. You see, when it comes to China, my sense is that parent company General Motors Corp. ( GM ), was a bit late to the party - like most U.S. carmakers - in terms of embracing the reverse mindset of success that I outlined above.

But at least they're working to redress that. For instance, GM last fall announced plans for a new $250 million research-and-development center in Shanghai . The facility will serve as GM's headquarters in the China and Asia-Pacific regions, and will work on China's pollution problems through research on such eco-friendly technologies as alternative fuels, hybrid cars, and more-efficient power trains, including those utilizing new technologies.

[ Editor's Note : "The View From China" is an investing travelogue chronicling Money Morning Investment Director Keith Fitz-Gerald's current journey through Mainland China. Fitz-Gerald last wrote about how China's version of capitalism affects the lives of its consumers. Next up: A look at Hong Kong. For a detailed look at China stocks, please take a look to see how you can obtain a free copy of investing guru Jim Rogers' new bestseller , " A Bull in China ."]

News and Related Story Links:

By Keith Fitz-Gerald
Investment Director

Money Morning/The Money Map Report

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