Investors' perceptions of China have changed dramatically. Five years ago, China was the growth story you couldn't afford to miss. Then it was the country that helped lead the world out of the global recession. But lately, China has become a property bubble waiting to burst and a hodgepodge of accounting fraud and deception.
It might not seem like it, but all of those perceptions were a part of China all along. It shouldn't be a surprise that many of the reverse mergers of the past few years have been disasters. Reverse mergers have always been a way for companies to go public without going through the scrutiny that comes with filing a prospectus and having to do road shows.
These headlines, though, don't change China's growth potential, it just means investors need to take some of the same precautions with Chinese companies that they take with domestic ones.
In a couple of weeks, our Global Gains team will head to China to identify ideas that capture that growth potential. Most of the trip will be spent meeting with company management teams, but we'll also be on the ground gathering information to refine our thinking on some of the big multiyear trends playing out in China. Three that I'm most interested in are China's environmental needs, food inflation concerns, and the transition to a more consumer-driven economy.
Water and the environment
China has a long history of water shortages in its northern provinces. The Yellow River is the region's main water source, but increasing consumption and pollution in western China often make its water undrinkable, when it isn't running dry.
China's solution is to divert water from the south, where it is more plentiful. This, however, requires transporting water thousands of miles, reduces the availability and quality of water in the south, and is expensive. According to a recent New York Times article, there are also concerns that the water reaching the north won't be drinkable, so at least one city, Tianjin, is looking into desalination options.
The challenges of the project are likely to benefit General Electric
Putting food on the table
In addition to eating well, we've also eaten affordably on our previous trips to China. Compared to what we pay at home, our meals are still likely to be affordable this year. However, a stronger yuan and rapidly rising prices for food mean it won't be nearly as good a deal. We'll be just fine, but this is something Chinese are dealing with, too.
Despite its massive population, China has historically been largely self-sufficient in the production of wheat and other basic foodstuffs. But this year's drought conditions have been devastating to wheat production, and China's ongoing water struggles and rapid urban expansion are reducing the amount of arable land. China will do everything it can to remain self-sufficient, but the trend points toward China become an importer, and Archer-Daniels-Midland
Is the consumer boom for real?
China has grown its exports by rapidly building out infrastructure to support its manufacturing base. The build-out itself has been a big part of the growth in China's economy. This will continue, but the government wants to rebalance the economy by increasing the portion of GDP that comes from services and consumer spending.
Some China followers don't buy it, because China's newest five-year plan still relies heavily on infrastructure spending. My concern is the pace of Chinese consumer growth, but I believe consumer spending will grow because it's a transition that's necessary for the Chinese economy to mature and become more stable. Right now, I think it's PepsiCo
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After our meetings, the Motley Fool Global Gains team will be hitting the grocery stores, shops, and restaurants to get a feel for how pricing and the level of activity in the shops compares to previous years. We'll be looking for the best opportunities to capture the growth in Chinese consumer spending, and I'll be looking to see if what we learn supports my thinking on these three trends, or if I'm overestimating China's challenges and ability to change. To get all of our dispatches in real time from the field and follow along with what we learn, sign up with your email address in the box below.
Nathan Parmelee is the co-advisor of Motley Fool Global Gains. He has no ownership position in any of the companies mentioned. Kadant is a Global Gains recommendation. The Motley Fool owns shares of PepsiCo. Motley Fool newsletter services have recommended buying shares of Procter & Gamble and PepsiCo. Motley Fool newsletter services have recommended creating a diagonal call position in PepsiCo. 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.