U.S. Vs. China: A War of Money
“China owns most of our national debt” is one of those phrases I hear quite often, especially from retail investors. But, from the way they say it, I get the sense they mean, “China owns the U.S.”
Strictly speaking, the Chinese government owns $1.166 trillion worth of U.S. debt. (Source: “Major Foreign Holders Of Treasury Securities,” U.S. Department of the Treasury, last accessed October 16, 2017.)
By comparison, the Treasury Department owes $5.084 trillion to other countries, including Japan, Ireland, and Switzerland. So no, China does not own “most of the national debt.”
However, it does own enough to make people nervous. And those fears are made worse by some disturbing trends. For instance:
- China surpassed the U.S. in GDP last year. (Source: “GDP ranking, PPP based,” The World Bank, July 1, 2017.)
- China also surpassed the U.S. in trade. (Source: “The China Shock: Learning from Labor Market Adjustment to Large Changes in Trade,” The National Bureau of Economic Research, 2016, 8(3), 205-240.)
- There are more billionaires in China (568) than in the U.S. (535). (Source: “China has more billionaires than US: Report,” CNBC, February 24, 2016.)
- Chinese firms are buying major U.S. companies.
- China increased its military presence in the Strait of Hormuz. (Source: “Iran and China conduct naval drill in Gulf,” Reuters, June 18, 2017.)
Individually, any one of these bullet points is easy to dismiss. Together, though, they paint a picture of China and the U.S. being at odds for global economic supremacy.
But here’s what I don’t understand: if this is a financial war, why don’t American investors buy up shares in Chinese tech companies? That way, the gains of Chinese expansion flow back stateside.
Investing in Chinese Tech Giants
My point in a nutshell is that U.S. investors can balance the playing field by investing in Chinese companies. And they can make tons of money while doing so, because many of these businesses are just as innovative as U.S. tech companies.
Except there’s one big difference: Chinese tech giants have a native market of 1.5 billion, whereas U.S. companies have a native consumer base of 350 million.
One of these slumbering giants is Baidu Inc (NASDAQ:BIDU). It’s essentially the “Google of China.”
Chart courtesy of StockCharts.com
Three-quarters of all search queries take place on Baidu’s search engine, which is eerily similar to Google’s dominance in North America and Europe. (Source: “China search engine market share in Apr 2017,” China Internet Watch, May 15, 2017.)
Baidu’s stranglehold on searches is even more impressive when you look at smartphones. It has an 82.46% share of the mobile market, compared to 13.79% for the next-biggest search provider.
And just like Google, Baidu has been incredibly good to shareholders. In the eight years since it was listed on the NASDAQ stock exchange, BIDU stock price advanced 1,139%. But don’t make the mistake of thinking that Baidu is at the end of its run; there’s a lot more gas in the tank.
Here are a few of the financial highlights:
- Revenue: Increased 14.3% year-over-year
- Net Income: Increased 82.9% year-over-year
- PEG Ratio: Far below U.S. tech rivals
- Forward P/E: 29.46
Aside from these financials, however, there is a simple fact that Chinese economic growth is outstripping U.S. growth three-to-one. As more and more of the population comes online, Baidu is sure to keep growing in size and economic power.
Also, China is not a fully competitive environment yet. You still need to know the right people for your company to take off, which means that the game is slightly rigged in favor of existing companies like Baidu.
Ordinarily, this kind of security leads to complacency. But Baidu is trying so hard to compete with Google and Facebook, Inc. (NASDAQ: FB) that it’s investing tons of cash into research. The company even opened an artificial intelligence lab in Silicon Valley.
But what does this mean for the Baidu stock price?
We believe that BIDU stock will continue to appreciate quickly, first to $300.00 and then much further afield. Since its underlying demographics are strong, we could even see the Baidu stock price reach $650.00 by 2020. Not only would this mean triple-digit gains, but it would also help U.S. investors get a slice of China’s miracle economic expansion.