02/13/2004 12:00 am EST
Born in Manila, Lilia Clemente has been a pioneer in emerging markets for over 30 years. She founded Clemente Capital in 1976 and serves as chairman and portfolio manager. Here, she makes a case for China, and offers some top stock picks for the region.
"China is in the center of a remarkable region. It took America 100 years to industrialize. Japan took 40 years. And China has now done this in under 20 years. And in the past ten years, China has been growing on average some 9.3%. It’s been explosive. Indeed, China’s floodgates are being opened today. Per capita income is growing sharply. And in China, we have what we call the four ‘Cs’. First, when you get money you buy a rice cooker, then an air conditioner, then a computer, and then a car. In China now, there are color TV sets in almost every urban home and 200 million have cable TV, making China the world’s largest cable market. There are air conditioners in half of urban homes, and washing machines and refrigerators in four out of five. When I first got to China, the per capita income was $300. It is now $1,000. And the goal by 2020, is for the Chinese population to increase its per capita to $2,000. Between China and India, you are exposing half of the world’s population to capitalism–which is why I feel so good about the future.
"What are the risks? There are currency concerns, there is risk of inflation, and there is international pressure. Foreign direct investment has been the main driver of Chinese economic growth and many question if this is sustainable. The financial system is the lifeblood of any economy, and there is much talk about the poor quality of China’s banks. Recent growth–running at 9% a year–has raised fears of overheating. I agree that industrial activity is poised to slow down. But private consumption should allow any slowdown to be moderate. So when you look at Chinese companies now, look at consumption-oriented firms, and less on those that depend on exports. China’s economic success is not based on a goal to grow as fast as possible, but to improve the quality of growth–it’s a balancing act.
"Yes, China appears to be the promised land. It’s a fast moving locomotive. But you have to be careful. Here, I offer six blue-chip stocks. The theme that underlies these stocks are demand-driven inflation. We would still be looking at oil stocks and commodities. Here, we like Shanghai Petrochemical (SHI NYSE) and China Petroleum & Chemical (SNP NYSE), which have a huge advantage in higher margin products. We also like the healthcare and pharmaceutical sector and we like China Pharmaceutical (CHPTY Other OTC). Also, look at beneficiaries of China’s policies such as utilities. We like China Resource Power (CRPJF Other OTC). Then, we like the domestic consumption stocks–Tsingtao Brewery (TSGTY Other OTC). And we would look at China Telecom (CHA NYSE).
"Investing in China may not be for everyone. Right now, the market is overvalued. Reforms have been taken in measured steps and there are a lot more reforms to be made. There will be some bumps, but in the long run, if you hold on to your seats, you will get the ride of your lifetime."