China’s Engine Will Keep Chugging

01/16/2008 12:00 am EST

Focus: GLOBAL

Neil George

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

Neil George, editor of Personal Finance, says the Chinese economy will continue to grow strongly even if the US consumer stops spending.

China is more than a cheap labor camp that pumps out stuff for US export. It’s a real economy, where folks are earning more and spending more with or without the US consumer.

Although the nation has one of the world’s highest household savings rates, this hasn’t precluded Chinese spending, which has been rising at a rapid annual rate just shy of 16%.

This means China can do more than just sell to the US; it can build and sell more at home. China’s trade [also] continues to mature in its global scope. It’s no longer just a one-way ship to the US; European imports exceed what we receive from China. And the rest of Asia takes what China makes at a rate multiple times above what is sent to the US.

There’s one more interesting twist to the China market worth noting: for years, Chinese companies were all about trying to attract capital to jump start the turnaround from a centrally planned economy to its current free-market frenzy.

But now, flush with trillions of renminbi from domestic savers and investors, along with more than a trillion-plus dollar, euro and yen reserves and investments, China is now diversifying its own investment portfolio.

In just the past several months, China’s leading investment banks, as well as the China Investment Corporation (a quasigovernmental sovereign wealth fund), have gobbled up big chunks of leading US and European banks and financials for dimes on the dollar.

The recently liberalized foreign investment rules for Qualified Domestic Institutional Investors (QDII) are empowering locals to broaden their global reach. This should bode well for many of China’s internationally focused companies, from small to midsized enterprises that currently make up some 60% of the nation’s gross domestic product to the mega-institutions that comprise the rest.

Let’s start with an easy means to keep cashing in—one of the few open-end funds we hold, Guinness Atkinson Asia Pacific Dividend Fund (GAADX). Despite the continued easing of investment rules and execution in the region, it’s still easier to buy into a good, solid collection of our favorites, as long as the fund owns what we would buy directly. This continues to be the case under the hand of manager Edmund Harris.

Like us, Guinness is investing in the region’s domestic growth and not just exporters to the US. It shows. The fund’s stocks keep piling on profits, with gains for the trailing year just shy of 30%. It may be a bit behind some of the more go-go stocks in the local market, but that’s because it’s focused on the bedrock companies that also pay us decent dividend flows along the way—from communications and energy to transporters and real estate.

Continue to buy GAADX under 20. (It closed Tuesday below $16—Editor.)

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