Where to Go for the Best Chance for Profit

“Calling the Trend” Column, by by George Leong, B. Comm.

No matter how you look at it, China is widely regarded as one of the world’s top growth regions for investors looking for opportunities to make big profits. The risk is higher due to the communist political system that can easily change the business environment without much regard. For instance, a law was introduced that restricts foreign operators in the online games sector in China. Yes, there are risks, but you cannot ignore the abundant rewards that can be had for traders.

If you visit any one of the tier-one cities such as Beijing or Shanghai, you’d immediately notice an astounding amount of development there. These cities are growing at a staggering pace that would make development in the West look tame by comparison. Even the tier-two cities that are smaller but have above average business growth are accelerating as far as growth and population, and attracting the attention of investors.

The World Bank just increased its economic growth forecast for China in 2009 to 8.4% versus the previous 7.2% estimate in June. The increase was attributed to the company’s major economic stimulus plan that has helped to drive infrastructure spending across the country and build more capacity. China’s GDP growth is predicted by the World Bank to rise to 8.7% in 2010. Yet the World Bank also said that sustainable growth will need to be driven by “more emphasis on consumption and services and less on investment and industry.” This makes sense. Traditionally, the Chinese are savers, but, for the country to grow, consumers will need to increase their spending habits. Only about 20% of China’s GDP is due to consumer spending, versus about 70% in the U.S. As consumers spend more, it will help to drive economic growth.

China’s President, Hu Jintao, wants to increase the country’s domestic consumption and cut its dependence on exports. Think about it: China currently needs buyers for its goods, otherwise growth suffers. The U.S. has been a major trading partner, but the decline in consumer spending has reduced the demand for Chinese made goods. So, what you have are plants with excess capacity and that are idling, waiting for foreign demand to rebound. This is dangerous and is a key reason why the country wants to boost its domestic consumption of Chinese goods. Longer-term, this will help China in its pursuit to become a dominant world economic power.

If the country’s per capita income continues to rise and people continue to spend, we could see incredible growth in China and less of a reliance on foreign demand. With over 1.3 billion people and a middle class of about 300 million, you have the foundation to generate demand.

The Chinese auto sector is a testament to this, marked by impressive growth, especially given how bad things are in North America. The major U.S. automakers may be struggling here, but they are reporting strong growth in China and investing heavily there. European automakers are doing the same. In October, sales of passenger cars in China surged 75.8% year-over-year to 946,400 cars, according to the China Association of Automobile Manufacturers. German carmaker Audi also said it would sell more cars in China than Germany by 2013 — and perhaps earlier. Audi is predicting sales of 130,000 vehicles in China this year and the early indications are that this will be surpassed.

The key with China is diversification as far as foreign exposure goes. Don’t load up on Chinese stocks, but make sure you have ample positions.