The China Factor

Unless you have been in a cocoon, you most likely are aware that China will in all probability become the next economic superpower in the world. The countrys economy is on steroids, growing at close to double digits over the past few years and this is not expected to change.

And if you understand the vast size of the countrys economic engine, you would also understand that China is a place where you need to have some capital invested. Of course, at the same time, you also need to fully understand the risk factors associated in investing in a country where the economy and corporate structure is strictly under the control of the communist-led government.

The concept of an open economy in China is debatable as there is the constant threat of government intervention at any time to suit the political agenda. Yet the risk is probably warranted given the vast growth opportunities that lie in the country for both multi-national companies and investors looking for some diversification outside of their borders. This region of the world will become the next big boom in economic growth as long as the Chinese government is willing.

A report just published by the Development Research Center of China's State Council estimates that the country will report GDP growth of about 8% annually from 2006 to 2010. Based on the numbers we have been seeing, this estimate seems to be reasonable.

The report estimates that Chinas GDP based on 2000 prices will hit USD$2.3 trillion by the end of the current five-year period in 2010.

In the subsequent 10-year period from 2010 to 2020, the report calculates a decline in the annual GDP growth rate to around 7%, which is still quite respectable.

For investors, the estimated numbers are staggering but then China must be able to manage any inflationary and growth-related issues going forward as the country becomes richer.

The countrys middle class of several hundred million strong is booming as citizens move from the countryside to the cities in search of opportunities to increase their wealth.

As Chinese citizens make more money, they become more consumption driven. This in turn pumps up the demand for both domestic and foreign good and services. Thats why we are seeing such a mass flow of companies into China searching for growth opportunities.

The bottomline is you need to be in China at some point. In future commentaries, I will examine some of the key Chinese stocks trading as American Depository Receipts (ADRs) in the U.S.



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