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
For those investors looking for American companies that are increasing sales in China, Apple
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
- 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."
- 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.
- 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.