It's China's World, You're Just Investing in It

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The modern China story is an amazing one. In the 30-odd years since Deng Xiaoping decided to open up the economy, China has performed nothing short of an economic miracle. Cities that were once small fishing towns are now bustling metropolises home to millions of people. Millions upon millions of Chinese have been raised from poverty.

Just the beginning
China is a country of 1.3 billion people, and the slight majority of them (674 million) still live in rural areas, but this is rapidly changing. According to the recently completed 2010 population survey, since 2000, China's cities have welcomed 207 million new residents. Of course, surveys are notoriously difficult to perform accurately, and this number also doesn't include millions of migrant workers who don't officially live in the cities.

They're coming; we better build it
All these people need homes, sewers, electricity, and phones. They also need roads, railways, and airports to get to and from home and get the goods they make out to the rest of the world.

All that requires raw materials like iron, copper, oil, and coal. Oh, and food, too. Fortunately, China knows where to get these things, and has the money to do so -- Australia, Canada, Brazil, and the African continent are rich in the natural resources China needs to build its future.

We're running out!
There is a large group of analysts who blame the dramatic spike in commodity prices in 2008 and the raw material inflation we're seeing today on supplies' failure to keep up with China's hunger.

This supertrend, they argue, is here to stay as more and more people in China and other emerging markets increase their spending power and want to live like their counterparts in developed markets.

At the same time, there are those who say things aren't as bad as they seem on the commodity front. Freak weather (floods in Australia, droughts in South America and China) and natural disasters (wildfires in Russia, earthquakes in Chile and Japan) have created special circumstances that have temporarily increased commodity prices, but things will return to normal eventually.

Who really knows?
I say it doesn't matter. Whether we can pull stuff out of the ground fast enough, there will be millions of Chinese people moving into new houses, buying things they've never had before, eating a more diverse diet, and trying to get to new places. That is as much of a given as you get. So invest for it.

If you fall into the first camp, you must believe that the currently high commodity prices are a jumping-off point, so you want to invest in the people selling dirt to the Chinese. Look to the major miners who have exposure to many different metals and geographies and who can easily shift production and investment to the lowest cost, most profitable ones.

Look to companies like the Australian behemoths BHP Billiton (NYSE: BHP  ) and Rio Tinto (NYSE: RIO  ) or the Brazilian giant Vale (NYSE: VALE  ) . Their size means you won't necessarily hit a home run overnight, but growing long-term demand will provide strong returns for years to come.

If you are more a fan of the soft commodities, companies such as Cresud (Nasdaq: CRESY  ) and Adecoagro (NYSE: AGRO  ) that own high-quality farmland in Argentina and Brazil are the place for your money, as this land will become more valuable as Chinese people increase the size and variety of their diets.

I laugh in the face of inflation
If you have faith in human ingenuity, and don't think we're facing a Mad Max future, you can still profit from rising incomes in China. Companies such as China Mobile (NYSE: CHL  ) and Baidu (Nasdaq: BIDU  ) are bringing the information age to China. China Mobile commands 68% of the Chinese mobile phone market, but only 7% of China's mobile users take advantage of 3G technology. Baidu currently claims nearly three-fourths of the search revenue in China, and with only 477 million Internet users, there is plenty of room for growth.

Regardless of which camp you find yourself in, it is clear that Chinese consumers are going to dramatically shape the investing world for years to come. Tim Hanson and The Motley Fool's Global Gains team (of which I'm a proud member) will be landing in China in a few weeks to do some boots-on-the-ground research in order to find more ways to profit from this trend. To get our notes and thoughts during the trip, just enter your email address in the box below.

Nate will be on the lookout for a nice farm in the Chinese countryside, but he doesn't own any of the stocks mentioned above. The Motley Fool owns shares of China Mobile. Motley Fool newsletter services have recommended buying shares of China Mobile and Baidu.

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 doomsday bunker and a disclosure policy.

Read/Post Comments (2) | Recommend This Article (16)

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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 June 02, 2011, at 6:28 PM, xetn wrote:

    Much of the growth in China has come from huge amounts of government spending, which has contributed to real estate bubbles in some of the major cities. The governments (including provincial governments) have built huge cities that are standing nearly empty. All of the government spending is creating a lot of price inflation in food, basic commodities as well as real estate.

    The good news for Chinese is they are very frugal and save large amounts of their income. As a result, most Chinese use cash (many don't have bank accounts or credit cards) so their debt is low. The other characteristic is they are very industrious.

    I believe the sever price inflation, especially in basic living expenses will cause the government some problems in the near future.

    From a political standpoint, out of the 1.3 billion Chinese, only about 80 million are members of the communist party.

    Not trying to make any particular point, just stating some facts for living there the last 2.5 years.

  • Report this Comment On June 02, 2011, at 9:35 PM, Kiffit wrote:

    It seems almost blindingly obvious that the effects of new and dynamic Asian and South Asian players in the modern industrial game of unlimited growth is that we reach the ultimate limits of growth that much more quickly. The environmental signals that this game is unsustainable are legion and in-your-face already. To activate this suicide pact with the future, all we have to do is maintain business-as-usual. Ho hum.

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