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1 Stock to Profit From China's Tremendous Growth

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My favorite high school teacher told me in 1979 that I should get an MBA and study Chinese. If I did that, he said, I'd become a very rich man. Back then, he strongly believed that China was on the verge of spectacular growth.

My teacher, a former Marine who had served as an advisor to the Kuomintang during the Chinese Civil War, knew a lot about Chinese culture and history. And his prescience about that country was truly remarkable. I definitely should have listened to his advice.

The new workshop of the world
China's economic growth is almost beyond belief. According to Jim O'Neill, author of The Growth Map, China's economy has grown tenfold over the past 15 years. Last year alone, China increased its GDP by $1.4 trillion -- to $7.3 trillion. By 2050, O'Neill estimates that China's GDP could be worth $70 trillion. There's just "no overstating the importance of China" to the global economy, according to O'Neill.

The energy expert Daniel Yergin thinks it's possible that China could pass the United States by 2020 as the world's largest oil consumer. According to his data, China doubled its oil consumption between 2000 and 2010. And O'Neill estimates that another 260 million Chinese will be moving to urban areas in the coming years, which will provide even more stimulus for housing and transport infrastructure. It's very likely, O'Neill believes, that China's GDP will continue to grow at rates of 9% to 10% in the near future.

How do investors benefit from this extraordinary growth story? I think there are several possible strategies to deploy, but investors should tread carefully. Many Chinese stocks lost a lot of value last year, and some of its real estate markets are approaching bubble territory, according to some analysts. When it comes to China, a healthy dose of skepticism is probably in order.

Four stocks to consider
(NYSE: PTR  ) , which produces and distributes oil and gas in China, is one company that investors might consider. In The Quest, Daniel Yergin argues that China is a growing consumer of oil, and is an "increasingly important participant in the world oil industry." PetroChina, which saw its market cap grow by 70 times since its IPO in 2000, is well-positioned to benefit from China's insatiable demand for energy.

Baidu (Nasdaq: BIDU  ) , the Chinese Internet search giant, is another interesting investment idea. Fool analyst Rick Munarriz still likes it at the current price, even though the stock rose 21% last year, and was up another 20% during the first three weeks of 2012.

For those investors looking for American companies that are increasing sales in China, Apple (Nasdaq: AAPL  ) and Intel (Nasdaq: INTC  ) might be attractive ideas to consider. Fool analyst Evan Niu believes that "China is one of the best reasons you should still buy Apple." He reports that China is the company's fastest-growing region, with sales from the last quarter growing 270% year over year. Intel is also increasing it sales in China, which it sees as a huge growth opportunity in the near future.

I believe all four of those stock ideas will benefit from long-term trends in China. I'd like to talk about another idea, however, which is my favorite one of all.

One more thing...
My favorite company for investing in China is an iconic American company with outstanding management. As China urbanizes and its middle class continues to grow, I could see Chinese revenues for this company rising astronomically.

The company in question is Starbucks (Nasdaq: SBUX  ) . Here are three reasons why I think this is an attractive way to play China:

  1. Proven, committed leadership: CEO Howard Schultz is someone I admire tremendously, and he's fully committed to Chinese expansion. Currently, he participates in the China Club where he learns Mandarin and Chinese culture along with 300 top executives from the firm. Schultz is also making sure that his best people are teaching the folks in China all the things they have learned over the years. In a recent interview, he said, "I'm spending a disproportionate amount of time there myself; maybe it's my own paranoia."
  2. Demographics: According to O'Neill, per capita Chinese wealth is growing rapidly. In 2009, 65 million people had incomes of $35,000 or more. And urbanization, as mentioned above, is continuing to increase at a rapid clip.
  3. Demonstrated appeal: As Schultz points out, Starbucks has been in China for 12 years, and already has more than 500 stores on the mainland. On the last conference call, the company reported that it had recorded greater than 20% comps for six consecutive quarters in China. And it also opened an additional 48 net new stores in China, during the most recent quarter. Starbucks has taken hold there, and I suspect it's only just beginning to take off.

There's no doubt in my mind that China will continue its breathtaking economic ascent, and Starbucks seems like a reasonably safe way to benefit from that trend. It may not make me as rich as I would have become had I followed my high school teacher's advice, but it will be a great way to follow the incredible China growth story.

Our top analysts at the Fool like three other American companies, which are poised to benefit from China's dramatic development. To learn more about those companies, have a look at "3 American Companies Set to Dominate the World." Get the free report.

John Reeves owns shares in Apple. You can follow him on Twitter, where he goes by @TMFBane.

The Motley Fool owns shares of Starbucks, Apple, and Intel. Motley Fool newsletter services have recommended buying shares of Starbucks, Baidu, Apple, and Intel. Motley Fool newsletter services have also recommended creating a bull call spread position in Apple and writing covered calls in Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (10) | Recommend This Article (76)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 15, 2012, at 6:17 PM, cfravel wrote:

    All good choices for cashing in on Chinese growth, but I'd've liked to see some more info on the SBUX growth story. Have they laid out their strategy somewhere? How many stores are there now? Growth over the last few years? Projected growth? How does Chinese consumption of Starbucks offerings compare with U.S.? I'd need to have some idea of all these things before I could speculate how well it would affect domestic stock.

  • Report this Comment On February 15, 2012, at 7:45 PM, EarlBerger wrote:

    The last time you wrote about this, your preferred company was YUMS; what happened to make you change your mind?

  • Report this Comment On February 15, 2012, at 8:09 PM, NJ7 wrote:

    Nice article, it brings to mind some of Jeremy Siegel's work. Siegel showed that extremely high rates of GDP growth have a negative correlation with stock returns, perhaps because of heavy capital expenditures in such an environment. So possibly the GDP growth is less important than the difficulties investors face investing in China and the less developed system to support investment (than in the US). I definitely agree that there are great opportunities in China, but I'm afraid some investors don't do their homework. Just because a company is in a growing economy doesn't mean it'll do well.

  • Report this Comment On February 15, 2012, at 8:51 PM, TMFBane wrote:

    @steltek, I definitely agree that it makes sense to take a deeper look. I was deliberately trying to be concise for the purpose of this piece. But I may decide to do a more focused article on just the SBUX opportunity in China. In the meantime, I'll share some of my notes and links when I'm back in the office tomorrow.

    @EarlBerger, which piece are you referring to? It may have been a colleague that wrote about that.

    @NJ7, You make an excellent point. One of the reasons I like SBUX is that I believe in the ability of the management team to capitalize on this opportunity. The demographics alone are just not enough.

    Thanks for all of the great comments, everyone!

  • Report this Comment On February 15, 2012, at 9:09 PM, rollon19 wrote:

    Whats your thoughts onFEED and SEED ? Once a company tanks is it gone forever?

  • Report this Comment On February 17, 2012, at 7:31 AM, dadb2 wrote:

    How about YUM, should prove to be a good holding in the Chinese market.

  • Report this Comment On February 17, 2012, at 9:29 AM, TMFBane wrote:

    @dadb2, I really like YUM's prospects in China. I was just reading something about it this morning in fact. I saw that as of 2011 it has 3,700 restaurants in China, and it has thrived there by allowing Chinese managers to tailor the food to local tastes. It seems to me like another great way to benefit from Chinese growth.

  • Report this Comment On February 17, 2012, at 12:14 PM, 100tradejack wrote:

    Not that I'd buy it today, but YUM looks good.



  • Report this Comment On February 19, 2012, at 9:56 AM, gilsh wrote:

    it is really funny, but it does seem that U.S brands - KO, YUM, MCD & SBUX, among others, are the ones making the best of the Chinese economic growth. My personal favorite is MCD though. you can't beat having a new branch opening planned every day for the coming quarters.

  • Report this Comment On August 14, 2012, at 10:51 PM, MHedgeFundTrader wrote:

    One of the great things about running a website with a truly global reach is that readers send me material which is nothing less than outrageous. So I had to laugh when I found in my inbox an animation of two bears discussing the hopelessly idiotic approach the US government has taken towards its trade with China over the past two decades.

    America gave away 25 million jobs, got nothing in return, with the end result that our standard of living is falling, while China’s is rising. The Chinese made this easy by devaluing their currency 50%, thus giving their exporters an unassailable price advantage. This has enabled the Middle Kingdom to buy an increasingly larger part of the US every year at knock down prices.

    The US could address this imbalance at anytime through the imposition of punitive import duties and forcing a revaluation of the Chinese Yuan. But any attempts to do so are fought off by well-financed libertarian pro business elements spouting the principals of free trade. So China laughs all the way to the bank, and the unemployment rate here ratchets ever skyward.

    The Mad Hedge Fund Trader

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