The 'Made in China' Sale is Over: Ways To Profit

Includes: BIDU, CAF, FXI, PGJ
by: Enzio von Pfeil

We put out some thoughts recently on what cost pressures China's manufacturers are facing - from higher costs to greedy western distributors playing one Chinese producer off against the next one in order to squeeze prices. Want to know how to turn this - China's first industrial revolution - into hard cash? Then read on.

What Beijing Proposes

This Saturday, the Assistant Governor of the People's Bank of China, Yi Gang, proposed policy tools with which to rebalance the mainland's economy:

1. boost domestic consumption;
2. nurture urbanization;
3. further open China's markets;
4. increase domestic investments;
5. import more, and
6. encourage more overseas investments.

The Politics Behind This

All politics are local, also in China. Two forces are at work. First, China knows that bullying from US Congressmen will force it to keep strengthening the RMB. That could dent exports somewhat, given that China faces enormous cost pressures, and is producing extremely low-end and thus price-sensitive goods.

The second political force is the 17th Party Congress: if Hu wants to have plenty of support, then he must not be seen by delegates to be succumbing to US bullying. So he is saying to his domestic political audience:"Look, we are not taking this American bullying lying down. We will not allow the Americans to force us to revalue our currency too much. Instead, can switch other domestic engines in order to relay less on exports to America."

The third political force is linked to the second one: Beijing has to create 10 million jobs a year - or it will be out of a job. So, policies like urbanisation create jobs. Remember that China is in her first industrial revolution, in which people go from the farm to the factory. But, if American bullying depresses Chinese exports, then domestic demand has to rise to offset the dropoff in exports. All the more so ahead of the crucial 17th Party Congress in which the continuation of Deng's capitalist policies will be given centre-stage.

How to make money off this idea

1. Always consult your financial adviser before buying stocks!
2. Buy Baidu (NASDAQ:BIDU): we put out a Market Time yesterday on how wonderful this company is. With very low internet penetration rates in China, and with Baidu owning 60% of the market, profits will blossom
3. Also, look at pure consumption plays such as retailers, autos.
4. Alternately, look at the whole urbanisation theme and load up on construction companies and building materials suppliers.
5. Buy companies in the capital goods industries of China.
6. Buy companies involved in imports and thus in transport (as in: once the imports reach the harbor, they have be transported somewhere).
7. Buy foreign investment banks or buy into private equity firms that will reap fortunes off helping domestic Chinese firms invest more overseas.