Opportunities in China for savvy investor
Consumers not exporters will be driving growth
Any discussion about investing in China typically comes down to the numbers. For Lily Xu of Mission Hill Capital, it is the numbers behind the numbers that count: “There are 36 million affordable homes to be built by 2015 under the [ Chinese] government’s current plan, and even that may not be enough,” she says.
The implication is clear: All of these houses will require an awful lot of timber, concrete, copper wire and other commodities, spelling opportunity for resource-exporting Canadian companies and anyone savvy enough to invest in them.
That sort of pitch is not new. China has long held about a sixth of the world’s population, and has been recognized as the world’s second- largest economy since about 2010. What’s changing now is the nature of the opportunity that the nation’s 1.3 billion people and $ 5.9- trillion gross domestic product represent.
For the first time, it is Chinese consumers who are going to drive the growth, rather than Chinese exporters. Like every economy, China’s rests on three basic drivers: investment, exports and consumption. The 2008 global recession alerted Chinese policymakers to the dangers of relying too much on exports and investments.
“Domestically, we’re faced with the challenge … of how to readjust and restructure our economy,” says Zhang Junsai, China’s ambassador to Canada. “[ We] can’t simply depend on exports and investments on infrastructures. [ We] also have to increase domestic consumption.”
Practically, this means recognizing that China cannot endlessly export manufactured goods to mature economies. Hence, the nation is starting to look to domestic demand to sustain future growth and to compensate for the drop in demand from its major trading partners.
For investors, that means rethinking how to benefit from China’s growth. While Canadian investors can get indirect exposure through commodity producers, Gavin Graham, founder of Graham Investment Strategies, recommends looking at companies that will be supplying and servicing China’s growing middle class directly.
Chinese businesses worth looking into can be “nice, stable businesses like utilities, teleptelephone companies, cement companies, breweries, or consumerproduct companies,” Mr. Graham says. In developed countries, these are often seen as reliable, albeit lower- growth, investments. In China, on the other hand, with economic growth ranging from 5% to 10% each year, these relatively conservative enterprises have earnings growing at between 15% and 25% annually, he says.
The upshot is, more than a decade after Goldman Sachs strategist Jim O’neill came up with the term “BRICS” to describe the four most advanced emerging markets, professionals, including Mr. O’neill, continue to see almost boundless opportunities — if investors are savvy enough to keep up with shifting conditions on the ground.