China’s New “Manifest Destiny”
Tony Daltorio, The Investment U Research Team
During my years of experience in the markets, I have found that the consensus opinion on Wall Street is often misguided, incorrect and downright wrong. Today the Wall Street “herd” is moving in the wrong direction again – they’ve missed the real story on China.
The conventional wisdom on Wall Street that China is an export-dependent, coastal-river-delta-driven economy no longer matches the realities in China. China’s economic growth is increasingly being driven from within.
And we need only to look at our own history to understand how…
In the nineteenth century, the United States relentlessly expanded across the North American continent and fulfilled its “manifest destiny.” Over this time period, the United States economy underwent a transition from export-oriented growth to a greater reliance on inner economic dynamism.
China and its economy are undergoing a similar transformation.
Despite the nearly 25% year-on-year drop in foreign trade for the first quarter, overall GDP growth for China came in at 6.1% during the first quarter. Wall Street skeptics argue that China’s economic performance is a product of China’s unsustainable fiscal stimulus package. But that’s not the real truth.
Here’s what you need to know about China’s real economic growth, and how you can profit from its movements.
China’s Hidden Consumer Spending
What the “experts” on Wall Street don’t know, is that the bulk of the planned infrastructure spending from China’s $586 billion stimulus plan has yet to even get under way because of problems with funding from local governments.
One key indicator that reveals the transition of China’s economy into an increasingly internally-driven economic force is retail sales. Retail sales in China have held up much better this year than in large Western economies. In March, retail sales grew year-on-year at a robust 15.9% rate. More important than the overall trend, however, is the composition of the retail spending.
Retail sales have slowed somewhat in China’s traditional growth areas – the major cities clustered around the Yangtze and Pearl River deltas – which are tied to export growth. The most robust consumer spending figures are coming from inland and so-called lower-tier cities rather than from the traditional growth areas.
Recent consumer surveys among an estimated 64 million middle and upper income households indicate a much higher propensity to spend among the residents of so-called second-tier and third-tier inland cities.
One result of this trend is a rush on the part of corporations globally to capture the spending of the inland consumer in China. Companies are seeking to offset slackening sales growth elsewhere by expanding sales efforts throughout the entire Chinese countryside.
For instance, Walmart plans to increase the number of its stores from five to nine in Chongqing, a city over 1500 miles inland up the Yangtze River from Shanghai. This means that Walmart will have more stores in Chongqing than in Beijing or Tianjin. It comes as no surprise that domestically-bound cargo traffic in Chinese ports continues to rise at a brisk pace.
Four Ways to Profit in China
Unfortunately, Wall Street continues to snooze, blissfully unaware of the profound economic changes occurring on the other side of the globe.
But just because Wall Street is missing one of the biggest events in global economic history doesn’t mean you have to. There are a number of exchange-traded funds or ETFs that allow American investors to easily participate in China’s internal growth.
And despite strong rebounds from their lows, many of these ETFs are still well off their highs of last year. Here are four that focus exclusively on China:
iShares FTSE/Xinhua China 25 Index Fund (NYSE: FXI) includes 25 of the largest listed Chinese companies.
SPDR S&P CHINA ETF (NYSE: GXC) tracks the S&P Citigroup BMI China Index. The index is more broadly based than FXI and includes over 300 stocks of all market capitalizations.
Claymore/AlphaShares China Small Cap Index ETF (NYSE: HAO) focuses on about 120 Chinese companies with market caps of between $200 million and $1.5 billion. These smaller companies are, for the most part, not government-controlled and more entrepreneurial.
Claymore/AlphaShares China Real Estate ETF (NYSE: TAO) focuses on nearly 50 large and mid-cap companies that are involved in real estate and infrastructure in China.
A more indirect, but also potentially very profitable, way to invest in China’s growth is through commodities. The largest economy in the world is a voracious consumer of raw commodities.
My favorite ETF in this area is from Van Eck – the Market Vectors Hard Assets Producers ETF (NYSE: HAP). This ETF is based on the Rogers Van Eck Hard Assets Producers Index, named after famed commodities investor Jim Rogers, which consists of hundreds of the world’s largest commodity producers including ExxonMobil, BHP Billiton, Monsanto, Potash, and Gazprom.
When it comes to China, investors should ignore the Wall Street conventional wisdom and pursue their own “manifest destiny” by investing in the China growth story whole-heartedly. Investors looking to play future robust economic growth in China will be best served by gaining exposure to both China and commodities directly through the use of ETFs, such as the ones discussed in this article.
Good investing,
Tony Daltorio
Related Investment U Articles:
- The PC Market Finds Big Money in Rural China
- Investing in China’s Rising “Social Safety Net”
- Asia’s Emerging Middle Class Consumption is Powering Up
- The Powerhouse Nation Behind A Volatile Commodities Market
- Investing in Chinese Stocks: Capture Growth and Manage Risk
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