Riddle me this, riddle me that…
It consumes half of the world’s cement, a third of its coal and one-quarter of its aluminum. It is second in oil and energy consumption, behind only the United States. It is the world’s largest consumer of iron ore, steel, copper and soybeans. It has more speakers of English as a second language than the United States has English speakers, period.
Quick, name that country.
Of course, it could only be China.
I’ve spoken on a number of radio shows over the past few weeks. The No. 1 topic of conversation is, without a doubt, all things China. People want to know what it all means and how it affects us. They want to know what is happening over there.
What’s happening is a staggering amount of growth.
How rapidly is China growing? Take the city of Shenzhen, for example. There is no precedent for it. In American history, Chicago was one of the fastest growing cities in the country. It took 50 years for Chicago to record its millionth resident.
Shenzhen did it inside a decade. In 25 years, it grew to be a city of 7 million people, while today it sits as China’s fourth-largest urban economy. China’s massive urbanization is mind boggling. Today, about three out every five farmers in the world is Chinese. But that is rapidly changing, too.
The Chinese are heading for the cities. Whereas only about 36% of the population currently resides in China’s cities, that number is expected to swell to over 45% by 2010 and 60% by 2030. China is building an infrastructure about the size of Houston’s every month to absorb the 300 million people projected to move to the cities over the next 15 years.
As I said, it’s mind boggling.
But that growth is not without its strains and stresses. China’s power needs dwarf its ability to produce it. Its cities are subject to occasional blackouts and brownouts, planned and otherwise. By some estimates, China has only 80% of the energy it needs. China adds electrical output the equivalent of Great Britain’s every two years, yet new investment cannot keep pace with demand.
There are other issues, of course, like awful pollution, extreme poverty in the interior of the country, a wretched banking system and more. Then there are the political questions.Beijing looms large on the scene, in a way Washington never did during America’s booming industrialization period.
So what are the investment implications of China, then? That is what we are here for, no?
Investing directly in China hasn’t worked out for most. Its business landscape is littered with the corpses of failed joint ventures, the shattered glass of broken dreams and a residual smear of cynicism about China’s complex business environment. One American investor described China as the ‘Vietnam of American business.’
Despite incredible growth — the Chinese economy grew by more than 50% from 2000-2004 — the Chinese stock market has lost a third of its value. This partly happened because the average listed share traded for 60 times earnings in 2000. They were expensive and popular, and mostly unprofitable for investors.
Still, the rise of China has changed the pattern of trade and is shaping the world’s markets in numerous ways.
Always looking for value, I’ve come to distrust investing directly in China. The best way to take advantage of China’s prosperity is to think of the long-term effects on the global marketplace.
For example, in the February issue of my Fleet Street Letter, I recommended a fertilizer company called Agrium (AGU:NYSE) that recently crossed over from small-cap to large-cap status. On the big-picture level, I wrote about how increasing prosperity in China — but also in places like Brazil — will have an impact on what people eat.
There are lots of good data to support the idea that increasing prosperity tends to create a shift toward more meat consumption. People get a little extra money in their pocket and they decide to eat pork and chicken.
Well, increased demand for meat leads to increased demand for livestock. Livestock has to be fed, so the demand for corn increases, since corn is an important livestock feed. The increased demand for corn leads to increasing demands for fertilizers, because of all the row crops, corn has the highest fertilizer application rate.
All this was part of the recommendation of Agrium, the result of a simple, step-by-step reasoning process. Plus, the shares were darn cheap. Today, the stock is up 29% for Fleet readers.
In any event, I advise readers to be careful. Don’t think that making money in China is going to be easy. I’ve heard it said that the only people going to make money in China are the Chinese. While witty, it may well turn out to be largely true.
A bit of verse by Rudyard Kipling also comes to mind: ‘And the epitaph drear: ‘A Fool lies here who tried to hustle the East.”
For Penny Sleuth,
Chris MayeEditor, Fleet Street Letter