CHINA’S GROWTH: HOW DO WE PROFIT?
How does one begin a more in-depth discussion of China today? There is so much we don’t know or understand. As I have been learning and gathering information for this article, I have been stymied by the multitude of interconnected factors. In this article we will focus on one question “How might one invest to take advantage of the growth of China?
While China is a now a member of the World Trade Organization, they play by different rules than we in the U.S. have become accustomed to. Our rules are governed by free markets (capitalism), demand and supply, transparency and the rule of law.
Capitalism is not the economic system in China. When the government of China sees a need for the development of an industry in their country, they provide cash, incentives, loans, etc. into that development. This is how the steel industry was born in China. They now produce 50% of the world supply of steel. Because the government subsidized the production costs, Chinese steel can be sold to the world for less cost than the US steel producers who must sell at a higher cost to recoup their true cost of production. The Steel unions in the US complain to their congressmen who want legislation to force China to act differently. The US administration listens, but must act with diplomacy.
The rule of law is not the same as in the US. Contract laws are enforced here, and patents are honored. China has a history of pirating products. Yet, U.S. corporations are hungry to gain profits from the growth in China. So, a company that wants to do business there faces several obstacles. First, it seems China wants to make it easier for their businesses to operate than for US corporations to do so. US corporations complain via the Commerce Department. The US administration listens, but must act with diplomacy. China admits they should make their rules more clear. US business want to do business in this growing market so badly, that they comply with China’s requirement that they share intellectual property in order to do business there, usually in joint venture with a Chinese corporation. Production begins, profits flow, the product experiences enhancements, and China begins selling the enhanced product as a new product, asserting that their technology, which was based upon U.S. intellectual property, is something to which they have a right. So we go to court for 10 years, suing for patent infringement. The US administration listens, but must act with diplomacy.
Buying into a Chinese corporation is another concept that is different between the two countries. The Chinese government may begin demanding profits be sent to the government (instead of to me, a shareholder) at any time. Owning a stock in a corporation doing business in China if they are giving away intellectual property doesn’t appear wise. So, what U.S. Corporation may grow with China’s economy? Consider Catapiller, as an example. The market likes that idea, so much so that its stock price is up about 40% year-to-date.
The safer way to invest may be into a diversified international stock fund. A more risky option is into a Chinese fund or a Chinese ETF.
By the way, what about investing into the other BRIC nations? Consider Indian ETFs. At least India is a democracy! Brazil has a new female leader, who trained at the knee of da Silva. Yet, Brazil may still be too socialistic for capital gain. Time will tell. I would continue to avoid Russia, especially since they have pointed guns at our allies recently.
In our next article about China, we will look at “The US administration listens, but must act with diplomacy.”