And they’re not alone
Not only is there a massive emerging middle class in China, who are all currently willing to work for a fraction of the cost of Western hemisphere labour, there is also a burgeoning middle class in India, a significant proportion of whom are well educated and speak more than acceptable English. These nations are two of four emerging economic powerhouses known by the acronym BRIC and who are expected to drive global growth deep into the 21st century. The remaining two are Brazil and Russia, which is where the acronym BRIC is derived from.
Cloak and dagger accounting
As exciting an opportunity as the BRIC nations provide there is, as always, an amount of risk associated, and arguably in this case an enhanced level of risk. Consider if you will the nature of double-entry accounting: every debit entry is matched by an equal and opposite credit entry. In China the nature of double-entry accounting is that there is one set of entries for the managers of the business and another set of entries entirely for investors in that business. Combine this with an overarching post-communism state-controlled economy with restrictive foreign exchange controls and a semi-fixed (or is that semi-floating?) currency and you have an investment environment that is fraught with more than just the usual risk suspects.
Buy the spades, supply the mines
During the gold rush it wasn’t only those that prospected for gold that made the real money, it was also those who supplied the prospectors with their picks, shovels and pans that did so. As the price of gold surges past $550 an ounce those that supply the mines with tyres for their trucks and food for their staff will benefit from the rising gold price without actually having to take on the risk associated with investing directly into gold. A similar approach can be adopted when attempting to profit from the Chinese growth story.
The Chinese Growth Story: Feeding the Dragon
Investing in those companies that are feeding the Chinese dragon is one way of profiting from the Chinese growth story. China is consuming vast amounts of the world’s basic materials - 47% of the world’s cement, 37% of its cotton and 32% of its rice is devoured by China. Steel and cement are materials that are produced by companies listed in our own backyard. Investing in companies like PPC Cement and Iscor is a way for South African investors to take part in the Chinese growth explosion without having to invest a cent into China itself. Essentially this approach seeks to benefit from China by investing in companies that are growing their income by supplying raw materials to China.
The Chinese Growth Story: Working the Rice Paddies
Another way to profit from the Chinese growth story is to invest in those companies that are working the Chinese rice paddies. Well, not so much the paddies themselves but more the people that till the soil and tend to the buffalos. Chinese labour costs are a fraction – and a small one at that, primarily because of the lack of ancillary benefits – of labour costs in the Western world and manufacturing companies that outsource their workload to China are able to benefit from significantly reduced labour costs which in turn reduce the overall cost of production. At its core this approach seeks to benefit from China by investing in those companies that are growing their net income by reducing their expenses having outsourced their manufacturing production to China.
A slow boat to China
We’d like to submit that the best way to get exposure to China, or to China through either of the approaches highlighted above, is to identify and invest in those investment managers around the globe that are the best at selecting companies that will benefit from China. Investments can then be made with these managers safe in the knowledge that your investment risk will be diversified across companies with differing levels and types of exposure to China. In addition these managers are likely to include and invest in companies that are not only benefiting from China but also from the overall emergence of Eastern Hemisphere markets, including Korea, India and Japan.
A slow and steady approach is sure to pay off handsomely over the long-term as any investment class that is receiving close investor attention is sure to have its share of mishaps along the way. Talking to your independent financial advisor will ensure that you benefit from and take part in one of the world’s most spectacular geo-political changes within your tolerance for risk.
