China's Struggle With Growth

Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

China has, for years, built itself on the backs of foreign consumers. Indeed, the “made in China” sticker that seems to be present on everything from electronics to clothing in the United States seems to show just how true this statement is. Cheap labor in China, where the average citizen makes in a year what some make in a day or less in the United States, has allowed the country to become a manufacturing powerhouse. This, in turn, has created vast financial reserves that the Chinese government has used to build the country, though some question to success of its investments.

This model is so ingrained in the country that some believe China isn't going to change its stripes any time soon. This is, essentially, the argument underpinning a recent article on The New York Times' China Insider Blog. Over the near term, there's good reason to believe that the transition to internal consumption, and thus self-supported growth, is going to be very slow. However, longer term, some very bright minds think the self-sufficiency story remains intact.

The Good Side
One such person is famed investor Jim Rogers. In fact, the “Investment Biker” was so enamored of the country's prospects that he moved there with his family. Although I don't recall where I saw the interview, Rogers noted that economic maturation isn't an easy process. He used the industrial revolution in the United States, with the industrial revolution's many forgotten atrocities, as a prime example of the fits and starts inherent in the process. He readily admitted that there were problems in China, but noted that it had come too far to turn back, if for no other reason than the country's population has seen change and is clamoring for more.

With the population and finances to keep moving forward, despite potential temporary setbacks, China continues to look like a long-term investment theme. To that end, how should investors try to gain access to the nation's long-term potential?

Direct To Consumers
China Mobile (NYSE: CHL) is a provider of cellular phone service in China and Hong Kong. It is among the largest cell providers in the world, giving it a large base of users and an annuity like revenue stream. The big opportunity right now is the shift from voice to data, which brings with it higher fees and, usually, increased usage. No doubt China Mobile will be a long-term beneficiary of this shift as more and more Chinese consumers find themselves with additional disposable income. Note that the company is, basically, state owned. So the government of China has a material influence on the company's business. This has likely led to China Mobile's use of technology that isn't an industry standard in the world. Still, with a 3.5% yield and direct exposure to Chinese consumers in a growing industry, China Mobile is an interesting investment option.

A Local Oil Major
PetroChina (NYSE: PTR) is a major integrated oil company. Although this company is also effectively controlled by the Chinese government, oil companies have a long history of stability because of their integration into the world oil industry. While PetroChina's business is centered on China, its reach is, indeed, much further than that, as it looks to secure energy resources for its home market. Operationally and financially, the company is roughly similar to most other major oil companies. The outlook for the company hinges on the growth of the Chinese market, and it is set to benefit as energy demand continues to increase. With a yield in the 3.4% range, PetroChina isn't the highest yielding oil major around. However, the yield is on par with the industry leaders and backed by the continued growth of the company's home market.

Building The Country
Caterpillar (NYSE: CAT) is one of the world’s largest manufacturers of construction and mining equipment, engines, turbines, and locomotives. The company has a large dealer network, covering the world with almost 200 locations and sees great growth potential throughout Asia. Although CAT has struggled of late, a long term growth trend in China would be a direct benefit to the company. However, investors might also want to check out Komatsu (KMTUY). The Japanese company is a well-established competitor to Caterpillar, and may have a leg up on its U.S. competition in some Asian and emerging markets. For example, it has a material market share in China that may allow it to benefit more from this country's growth prospects.

Feeding The Population
McDonald's (NYSE: MCD) and Yum! Brands (NYSE: YUM) are two other ways to gain access to China. In fact, Yum! considers growth in China to be its number one objective. They even went so far as to state that fact in their 2011 annual report. That's a huge statement, backed up by the fact that management expects the "consumer class" in the country to double in size by 2020. That represents years of potential growth for a company that has, largely, saturated its mature markets. The company is so enamored of China that it has even acquired Chinese fast food concepts to broaden its exposure to the country and, perhaps, more importantly, gain access to a “domestic” Chinese food concept. The opportunity that Yum! sees is summarized in this quote from the CEO: "We have about 58 Yum! restaurants per million people in the U.S. and only have fewer than 2 restaurants per million people in the top 10 emerging markets." China is the top emerging market for this fast food giant.

McDonald's, for its part, isn't as obviously enamored of China, but clearly sees a lot of long-term potential in the country. For example, the company noted that its Asia/Pacific, Middle East, and Africa segment effectively doubled in size in the six years leading up to 2012. Last year, China was one of the biggest factors in that segment's positive showing. The company has been working the value angle to spur growth, opting to extend its reach by broadening its offerings into different meal segments, notably breakfast and desert. McDonald's is an industry leader in the latter in China. The company is looking to get to 2,000 restaurants in China alone by the end of 2013. While McDonald's isn't leading the charge into China like Yum! Brands is, it clearly sees growth opportunities there. For those seeking a more diversified entry, this burger giant would be a good option.

Long-Term Growth
Investing in China isn't the easiest task for most investors, since direct market experience is understandably limited. However, by taping into that experience at some of the best companies in the world, investors can gain the exposure they desire and, if the projections prove correct, hopefully make some money, too.


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ReubenGBrewer has no positions in the stocks mentioned above. The Motley Fool owns shares of China Mobile and McDonald's. Motley Fool newsletter services recommend McDonald's. Try any of our Foolish newsletter services free for 30 days. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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