With no capital-gains tax and low corporate taxes, China has created a very friendly business environment.
By AARON KATSMANchina car 88 248(photo credit: )
As the world continues to be mired in an economic slowdown, and even the rosiest of scenarios has growth, albeit sluggish, returning late in 2009 and more probably in early 2010, the 8 percent GDP growth posted by China for the second quarter sure seems attractive for investors. China has become the world's growth engine.
China was quick on the trigger to institute a large $565 billion stimulus package that was very much targeted toward building-out infrastructure and getting banks to increase lending. The effect of this targeted stimulus has been superior growth and many economists expect 10%-plus growth for the second half of 2009 and the beginning of 2010.
Economist Larry Kudlow, writing in the National Review said: "Fortune magazine recently reported that the number of US companies in the world's top 500 fell to the lowest level ever, while more Chinese firms than ever made the list. Thirty-seven Chinese companies now rank in the top 500, including nine new entries. Meanwhile, the number of US firms has fallen to 140, the lowest total since Fortune began the list in 1995. This is not good.
"China also surpassed the US as the world's biggest automaker in the first half of 2009, with June sales soaring 36.5 percent from a year earlier. The Chinese registered 6.1 million car sales for the first half of the year. That way outpaced American sales, which were only 4.8 million."
With no capital-gains tax and low corporate taxes, China has created a very friendly business environment. Within this environment, a new middle class has emerged, which will probably be the largest middle class in the world in the not too distant future.
In spite of all the success that China is enjoying, there are still potential roadblocks ahead. Lack of corporate transparency, potentially high inflation, as well as a banking system that has lent money for decades to money-losing companies, are just a few reasons that could burst the China bubble. The potential banking crisis in China, because of bad loans, could make the US subprime debacle seem like child's play.
In addition, China faces a major water problem. As noted investor Jim Rogers said in a Money Morning interview, "China has a huge water problem. In Northern China, they're running out of water. They know this and they're working on it, big time. But if they don't solve it or if they don't solve it in time, then China - as you put it - has failed."
In the last four years we have seen huge rallies and equally steep drops. This year China is up over 70%. I get many calls from clients wanting to know what options are available for investors to gain exposure to this market. Investors need to remember that past performance is no indication of future results; an investment in China should be part of a broader investment strategy - and is full of risk.
For those investors who are looking at China, here are three ways that you may consider investing:
Commodities
This is an indirect way of investing in China. As China continues to record strong growth and build out its infrastructure, increased demand for basic materials to help the build-out may occur. Couple that with more disposable income from the new middle class, which should increase demand in cattle and other agricultural commodities, and China could singlehandedly pull global commodity prices higher.
Stocks, ETFs and mutual funds
For investors who want to take part in the explosive growth taking place in China, and can deal with the high risk for potentially high returns, there are plenty of Chinese stocks that now trade in the US, and a host of Exchange Traded Funds (ETFs) linked to different indices are now available. For investors who want someone to manage their exposure, many mutual funds exist that invest broadly in China and greater Asia.
Currency
For investors who don't want equity or commodity exposure, consider investing in the yuan. While just a few months ago it was virtually impossible for individual investors to own the Chinese currency, the launch of some currency ETFs linked to the yuan has made owning the currency much easier.
Many analysts believe that China will be the US of the 21st century. If this is so, it could potentially prove to be a worthwhile investment destination. Do some research or speak with your financial professional to see what type of exposure best fits your portfolio.
aaron@lighthousecapital.co.ilAaron Katsman is a licensed financial adviser, both in the United States and Israel, and helps people who open investment accounts in the US.
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