American and European Investors Can No Longer Ignore Making Investments in Chinese Companies

Last week’s dire U.S. economic news and employment data is very worrisome.  While many economists believe that a double-dip recession is not likely, it’s generally acknowledged that the U.S. will not return to significant economic growth for years.  High unemployment and a low rate of job creation will be the new normal for at least the next few years.

Complicating the economic outlook for the U.S. is inflation, which is hitting average American middle class consumers every time they fill up their cars with gas, visit the grocery store, or buy clothes at Target or Walmart.

The U.S. government’s huge debt and more importantly its unsustainable budget deficit also creates uncertainty.

And, the Eurozone is facing a huge problem.  It’s generally acknowledged that Greece will have to restructure its debt, or even leave the Eurozone.  Because of the huge impact that either of these ooptions would have on the entire Eurozone, the Euro and European banks, a temporary fix has been once again agreed to that essentially kicks the can down the road.

Since the attention now will, at least temporarily be off of Greece and its problems, concerns about Portugal, Ireland, Spain and even Italy are once again being raised.  These could
be a bigger problem for the Euro and Eurozone than Greece.

Many Americans and Europeans, who hold the two largest pools of investment capital in the world, are now asking what they should do with their money.

Americans have already seen the equity in their homes, the principal asset for most Americans take a huge hit.   At the same time, if Americans are sitting with cash in bank accounts or short term U.S. Treasuries, their net return is negative, after taking into account inflation, and the recent and inevitable continuing decline of the value of the U.S. dollar.
The answer for many Americans and Europeans is to invest in Big Emerging Economies, countries whose economies are growing and will continue to grow.  At the top of the list is
China.

There are many factors that make China compelling, and a country which can’t be ignored by investors.

China’s long-term growth prospects are incredibly positive.  One key factor contributing to China being able to continue its high economic growth rate is the country’s urbanization,
which according to the country’s 2010 census is under 50 percent, with over 670 million people living in rural areas.  By comparison, in Japan and the United States over 80% of the population lives in cities.   China’s rural residents are continuing to move to cities, seeking more opportunities and higher paying jobs.  This continuing migration to the
cities is resulting in higher spending on infrastructure, housing and commercial buildings, as well as increased consumer buying.

 

Despite all the positive news about China and the country’s economic miracle, China is still an emerging economy with a very low income per person, which is less than
one tenth of the U.S. per capita income. The government has announced the intention of raising the minimum wage 13% annually until 2015.  This will continue to fuel the rise of the middle class and the transition to more of a consumer economy from one that has been focused on exports.

China has also announced the intention to spend over US$1.5 trillion over the next few years in what it has identified as seven key industries.  These industries include, alternative and
renewable energy, biotechnology, environmental, technology, raw materials and value added and higher technology manufacturing.

The Chinese government is continuing with major infrastructure projects in rural and inland areas.  These include irrigation systems to increase the productivity of the agriculture sector, as well as major commitments to the construction of highways and roads.

China’s per capita consumption of electricity is also very low, and the demand for electricity is growing as the country’s economy is growing.  The government has announced plans to spend over US$260 billion on its electrical grid construction by 2015.  The increased electrical capacity will by itself create additional economic growth through increased commercial activity as well as the demand by individual households for appliances.

But the main question for many American and European investors is how to invest in China.  While there are many exchange traded funds (ETFs) and mutual funds available in the U.S. and Europe, many investors have generated better returns by investing in the shares of Chinese companies traded in the United States.

By investing in the shares of public companies, not only can investors participate by investing in companies in a country whose economy is working, but one in which they’ll also benefit by what most agree will be a continuing decrease in the value of the U.S. dollar compared to the Chinese renminbi.

Despite issues in the recent past, today there should be a high level of comfort by Americans and Europeans in investing in Chinese companies publicly-traded in the U.S.  Appropriate Chinese companies are those that are fully-reporting companies with the Securities and Exchange Commission (SEC), those whose shares trade on Nasdaq, the NYSE, or the OTC
Bulletin Board-QB and those who have demonstrated significant historical increases in revenues and profits.

While revenues of many of these Chinese companies traded in the U.S. continue to increase at an annual rate of 25 or 30 percent, with corresponding increases in net income,
many of these companies are substantially undervalued compared to comparable companies based in other countries.  In fact, many are trading at price to earnings ratios (PEs) of one-quarter to one-third of those of non-Chinese industry peers.

The main reason that many of these Chinese companies are significantly undervalued is that many American and European investors have stayed away from owning them. But, with
Europe’s and America’s economic and fiscal problems continuing, investors can no longer ignore owning Chinese equities.

As Americans and Europeans come to the conclusion that they have to own China, there is the potential of a huge increase in the price of Chinese equities, especially as the Chinese economy continues to grow at a 9 to 11 percent rate, and Chinese companies are able to generate huge annual increases in revenues and income.

 Author:  Jeffrey O. Friedland

 

China Indicates it’s Interested in Buying Portuguese Bailout Bonds

While it’s commonly believed that China’s biggest trading partner is the U.S., China’s biggest trading partner is actually Europe. It’s not therefore difficult to believe that China wants to keep the Euro, the currency of its biggest trading partner viable.

So, it’s not surprising that Beijing has indicated that it’s interested in buying Portuguese bailout bonds once the European Financial Stability Facility starts auctioning the bonds next
month.  While it’s easy to draw the conclusion that that this action by Beijing is a show of confidence in the Euro, which may be partly the case, a more likely reason may be that the action is part of a strategy by China to diversify its foreign reserves away from the U.S. dollar.