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Investing in the "New" China--when the time is right
03/11/2011 8:30 am EST
But the five-year plan also lays out a major shift in the Chinese economy. It calls for slower growth, increased domestic consumption, cuts in water and energy consumption per unit of GDP, a shift toward a service economy, an increase in urbanization, and a 13% annual increase in the minimum wage.
Clearly if you’re invested in China or interested in investing in China, you should at least tweak your investment strategy. But exactly how?
Let’s see how far we can get in this first rough draft of an answer.
In recent years the final version of five-year plans haven’t deviated much for the draft released at the start of the meeting of the National People’s Congress. So the outlines of this draft plan are likely to be very close to the final plan itself. Let me fill in a few details.
- Slower economic growth. The plan calls for reducing annual GDP growth to 8% this year and to an average of 7% a year over the five-year period. That’s a big change from the 10.3% growth in 2010.
- Faster income growth. The goal is to increase household incomes by 7% a year on average during the plan. One way to do that is by a 13% average annual increase in the minimum wage. Part is a result of creating 45 million jobs in cities. China’s urbanization rate will climb 4 percentage points to 51.5% during the plan.
- Construction or renovation of 36 million apartments for low-income families.
- A shift in the economy that emphasizes domestic consumption and the service sector instead of exports and manufacturing. Under this plan the service sector is to grow to 47% of GDP. That would be an increase of 4 percentage points.
- Pension schemes to cover all rural residents and 357 million urban residents.
- More efficient use of energy and water. Energy consumption per unit of GDP would be cut by 16% under the plan and water consumption per unit of industrial output would be cut by 30%. In addition non-fossil fuels are to account for 11.4% of primary energy consumption;
- General price stability. Inflation is now running at about a 5% annual rate.
As I wrote in my March 8 post http://jubakpicks.com/2011/03/07/china-sets-8-growth-target-for-2011/ I don’t think there’s any reason to doubt that China’s leaders take these goals seriously and intend to reach them. I just doubt that they can actually deliver on all of them. This isn’t Chairman Mao’s command economy anymore.
It’s important that investors incorporate some assessment of “commandability” in their investment strategy to take account of what will actually get accomplished and what is just words on paper.
Here’s my list of what is likely to happen because either the government in Beijing can make it happen or the goal is aligned with the self-interests of significant numbers of powerful companies and individuals. And some suggestions of what companies—in and outside of China--will benefit and what stocks to buy.
I’m going to start with four picks that represent the old China trends in the new five-year plan and then end with six stocks that represent the new and improved China.
- The government is going to build a lot of housing. Probably not all 36 million units that are in the plan. And many of those that may get built may not be for the intended low-income market. But it’s in the self-interest of China’s heavy construction industry to see lots of building and it’s in the self-interest of local governments to see land move from farmers to developers. A lot of this will happen. All that construction, plus the usual heavy infrastructure investment, will keep China’s demand for raw materials growing. Steel and copper consumption will continue to grow. Jiangxi Copper projects copper demand growth in China of 7% in 2011. Stock pick: Jiangxi Copper (JIXAY on the U.S. OTC or 358.HK in Hong Kong).
- The emphasis on energy efficiency and non-fossil fuels will mean continued growth for solar and wind energy companies. You’ve probably figured that out. But it should also lead to increased growth in China’s demand for uranium. By 2030, according to China’s National Energy Administration, China could be the world’s largest importer of uranium. And, surprise, China is likely to become one of the world’s biggest importers of liquefied natural gas. Last year China’s imports of liquefied natural gas rose by 69%. Stock picks: solar cell marker Yingli Green Energy (YGE), a member of my Jubak’s Picks portfolio http://jubakpicks.com/ and Australian uranium and natural gas play BHP Billiton (BHP), a member of my Jubak Picks 50 long-term portfolio http://jubakpicks.com//
- I think you’re right to be skeptical of Beijing’s ability to shift China’s economy significantly away from exports and manufacturing and toward domestic consumption and services. There are an awful lot of entrenched interests making lots of money out of the current division of GDP. But the government can achieve a good part of its goals by raising the minimum wage and the growing number of Chinese consumers with more disposable income will push toward the same goal. First, I’d look toward non-Chinese companies that have figured out at least the basics of selling in the Chinese market and that own brand with cache for Chinese consumers. Best Buy (BBY), which has closed its China stores and Mattel (MAT), which has closed its flagship Barbie store in Shanghai are reminders that getting it right isn’t simple. Chinese consumers remain extremely price sensitive and brand conscious. Best Buy’s idea of selling extra services just didn’t resonate with these consumers. Mattel misunderstood the current Chinese preference for cute over sexy. Stock picks: Sanrio (unfortunately the owner of Hello Kitty trades in significant volume only in Tokyo 8136.JP), leather goods retailer Coach (COH) , LVMH (volume for the maker of Louis Vuitton and other luxury goods is decent in New York LVMUY but much better in Paris MC.JP), and eyewear maker and retailer Luxottica (LUX). (See my March 3 post on Luxottica http://jubakpicks.com/2011/03/03/update-luxottica-lux-2/. Coach is a member of my Jubak’s Picks portfolio. You can find my most recent update there http://jubakpicks.com/ Second, I would add a dose of homegrown Chinese companies that get this whole consumer/service thing. Stock picks: hotel company Home Inns and Hotel Management (HMIN), department store owner and operator Parkson Retail Group (3368.HK for volume since the U.S. shares don’t seem to trade much), and Internet company Baidu (BIDU). (Baidu is a member of my Jubak’s Picks portfolio and Home Inns is on my watch list http://jubakpicks.com/ )
And speaking of watch lists, I wouldn’t rush out and load up on China just yet. In the first half of 2011, I think U.S. stocks will outperform just about all other markets. It will be time to start rotating out of U.S. stocks and into emerging market equities in May or so. For more on that timing see my post http://jubakpicks.com/2011/03/08/time-to-start-planning-how-to-rotate-out-of-u-s-stocks-and-back-into-emerging-market-stocks/
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. The fund did own shares of Baidu, Coach, Home Inns and Hotel Management, LVMH, Sanrio, and Yingli Green Energy as of the end of January. For a full list of the stocks in the fund as of the end of January see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/