China: Panic or Opportunity?

06/04/2004 12:00 am EST

Focus:

Neil George

Editor-in-Chief, Income Publication and Products, Agora Financial

"The old adage was that when the US economy caught a cold, the world got pneumonia," notes Neil George, editor of Personal Finance. "That might have to be updated to include China." Here's his outlook on China, and his top plays for future growth in the region.

"China just isn’t a market; it’s really an integral part of the world’s economy. More than 60% of last year’s big boost in trade around the globe was done by or through China. On the other hand, the boom in China isn’t without risk. Its leaders well remember the busts even if the rest of the world tends to forget them. And what concerns the Chinese is that if the economy continues to heat up, eventually the balloon of growth will pop. Beijing wants to keep development and investment flows but without risking overheating, like it did twice in the ‘90s. The game plan is to slow down speculative development in the property market and in industries where there are overcapacities, all while enabling the financial and banking markets to gain some greater stability and maturity—and while focusing investment and resources to more crucial areas.

"Energy and infrastructure is the trouble. The nation has power woes that are striking most parts of the economic heart of China. Gas and oil shortages, as well as distribution and refining, are causing many ongoing troubles. Banks are also part of the infrastructure that has to be fixed. And the government has not only begun to crack down on lending practices but also to recapitalize them. There will be new regulations on reporting bad loans and non-performing loans. Now with the financial and business crackdowns, many are looking for China to take down the region’s—and perhaps the world’s—economies. That’s not going to happen. Sure GDP will slow. But most economists are thinking that it will ebb to around 5% to 7% from the recently heady rates of nearly 10%. But again, it’s a calming—not a shutdown—after a heady steam of expansion. Should investors panic from a slowed China? No, just buy into companies and funds that have been there for a long time and avoid the hucksters and carpetbaggers. You’ll not just make it through, you’ll be well positioned to cash in long term from a healthier and better developed Chinese economy.

"One of our favorites is Growth Portfolio holding remains Hutchison Whampoa (HUWHY Other OTC). If you buy just one stock to profit from China and the Asian ascent, this is it. It's a wisely constructed conglomerate that controls a few key industries on the mainland and around the region. First is its prime industrial and retail real estate holdings. Next is its shipping operations; nothing moves around the world without paying Hutchison Whampoa. Then there's its telecommunications franchise, which ranges from the basic to cutting-edge third-generation technology. Finally, its energy division makes Hutchison a force in every strategic market in the most dynamic region of the world and beyond. Buy Hutchison Whampoa in small and consistent batches now and for the long haul.

"Hong Kong-based Lenovo (LNVGY Other OTC), which was formerly known as Legend Holdings, is building an impressive book of business. In China, one the world's biggest growth markets for computers, Legend is like Compaq or Dell. The company continues to sell computers and related goods to consumers and businesses at an astonishing pace. Just in the past five years, the company bolstered sales by an average of more than 57%. And with a consistent push for greater efficiency in production and distribution, margins remain impressive while regularly undercutting US and European competitors. It's also committing substantial resources to its digital recording and imaging sector. Its goal is to be the dominant digital camera/recorder/video producer in Asia. Despite the solid performance, Legend is still a value at just a smidgen above its trailing revenues, which is a 50% discount in value to the competition.

"In addition, investors should have a stake in Korea, which has some of the best bargain-priced companies. Posco (PKX NYSE) is making and selling an increasing amount of steel at great margins to the world, China and the US in particular. And with or without US steel tariffs, POSCO is a great buy up to 32. Samsung (SSNLF Other OTC) is tough to buy in the US, but if your broker can get it done buy the local shares up to KRW 485,000 (the equivalent of $405 in US dollars). And if you want both of these holdings, along with other leaders, an easier way to get them is to go with the closed-end Korea Fund (KF NYSE), which trades at a fat discount to its NAV of over 16% and is a buy up to 19. There's also one open-end mutual fund that we recommend for the region. Matthews Asia Growth and Income (MACSX) is a Growth Portfolio member and is run by some of the best in the business. The fund is as far from the chicanery of the mutual fund industry as you can get, and it continues to own some of the best stocks of Asia, all while generating income to go with its impressive long-haul price performance. Buy Matthews Asia Growth and Income at current prices."

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