Why Every Investor Needs To Have a China Investment Strategy

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Includes: FXI, PGJ
by: William Patalon III

As we’ve said time and again here at Money Morning, every investor has to have a China investment strategy.

And with the opening ceremonies for the 2008 Beijing Summer Olympic Games taking place today (Friday), this is probably as good a time as any to review the long-term case for a China investment strategy, and to look at the key factors investors should keep in mind as they put their investment plans into action.

An old Wall Street adage holds that "the trend is your friend," a precept that we wholeheartedly subscribe to. Indeed, as we’ve often told readers, the very best profit plays you’ll find will emanate from such powerful global market trends as globalization, the soaring demand for food-and-energy-related commodities, and the emergence of such new markets as Brazil, Russia, India and China.

And right now, some of the biggest global trends are being fueled by China’s white-hot economy, which is expected to advance at a double-digit clip this year - despite a global financial crisis that’s threatened to throw the U.S. economy into reverse.

But many investors are so concerned about that global financial crisis that they’re opting to avoid the volatile China market entirely, fearing there’s just too much risk within that growing Asian dragon.

Such fears are understandable: After all, the benchmark Shanghai Stock Exchange Composite Index is down 55.2% from its October peak, and was down as much as 58% - call it "double-bear-market" territory.

While "total avoidance" is certainly one form of China investment strategy - albeit an extreme one, at that - it’s not going to be a profitable one, at least not in the long term.

And the reason is simple: By avoiding China, investors are ignoring the facts - including the undeniable truth that China has become the world’s second-most-important country, and a reluctant superpower.

You need proof? Consider these facts:

  • In 2007, China contributed more to global growth than the United States - becoming the first country to do so since the Great-Depression-ridden 1930s.
  • China last year took over the top spot as the world’s largest consumer, pushing past the United States as the biggest user of four of the five most basic energy, food, and industrial commodities, Newsweek reported.
  • China’s manufacturing sector is now bigger than its U.S. counterpart, with an output value that eclipses the $2.7 trillion in annual production generated by U.S. factories - a capability that could ultimately also enable the Asian Grand Dragon to position itself as a military superpower.
  • And China is now the world’s No. 2 market for automobiles and the No. 1 producer of ocean-going merchant ships.

And this is just the beginning.

During a January 2007 speech in Beijing, economist and former U.S. Treasury Secretary Lawrence H. "Larry" Summers pointed out that Europeans who lived through the Industrial Revolution saw their standards of living increase by about 50% during their average 40-year lifespan. When industrialization spread to the more-entrepreneurial United States, living standards of the beneficiaries improved by four to five times. But residents of Asia - and especially China - who live through the ongoing "Asian Miracle" will see their living standards improve a hundredfold during their lifetimes - or 10,000%.

The wealth created from all this growth during our lifetimes alone will be enormous. But it won’t happen overnight, and it won’t occur in a straight line. Just as we’ve seen here in the U.S. financial markets, there will be periods of political and economic strife that whipsaw the values of such assets as stocks, bonds and real estate. Long-term, however, the trend is for the value of these assets to increase - and at a much steeper rate than we’ll see in any other market in the world.

That’s particularly true at a time when the United States may well be facing a Japanese-style "Lost Decade."

And that’s also why it’s crucial for every investor to have a China investment strategy.

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