How to Invest in What China Really Needs

There must be more communists in Berkeley than in Beijing. That thought crossed my mind as we swept through Beijing’s wide streets, crowded with cars and lined with tall modern buildings. A more bustling capitalistic city would be hard to imagine.

I think most Americans would be shocked to see Beijing today. A friend of mine, well traveled and well-read, told me he thought he would find a city to compare to Mumbai or Managua. Instead, he found a city to compare to New York or Chicago.

I sent back video clips of some of the highlights to another friend. After watching a few clips he wrote: “I suspect that what a lot of Americans are unsure about is the size and scope of what’s really there in everyday life in China. In most memories, it’s a nation of rice scroungers…raking the good earth with fingers crossed.”

One of the clips I sent gave you a peek inside a busy Carrefour, a French retailer running a Wal-Mart-like operation in China. My friend continued, “Yet here there’s a butcher with piles of fresh, red meat out in the open (it MUST be selling fast to be out like that)… and 30 kinds of toothpaste on the shelves… and 60-plus cash registers jammed with customers.”

All of the world’s best-known brand names were on display in brightly lit wide aisles. You almost have to see it to believe it. Even in the five years since I was here last, Beijing has changed a great deal. Surprise, though, has become something of a routine here.

In 2001, consensus opinion had the population of Beijing hitting 14 million by 2040. It topped that by 2003. Today, it has about 22 million people. Also in 2001, experts thought that Beijing would have – gasp! – 1 million cars on its roads by 2010. It also topped that figure in 2003. Today, there are nearly 5 million cars on the road.

China is now the world’s largest car market and is quickly becoming the world’s largest market for a number of consumer goods. It’s also the world’s largest market for mobile phones. We saw plenty of Beijingers chatting away at checkout counters and in their cars just as people do in the US.

The whole country isn’t like this, of course. We wandered about 40 minutes from downtown and visited a small village still technically in Beijing. We walked down dusty lanes, past modest dwellings and a small Buddhist temple. Villagers smiled as we passed. They don’t see foreigners here much, but you could stop and get a Coke and a Snickers bar.

We also happened to meet the head of the village, who greeted us warmly and showed us inside his house, a small courtyard home. After snapping a group picture, he asked us to e-mail a copy, and we dutifully wrote down his address. Some of these homes don’t have a private bathroom, but you can still send e-mail.

That’s China for you, in a nutshell. It’s been an uneven advance – and there is still a long way to go.

Back in central Beijing, we visited a Bank of China branch. There were 77 teller windows. In the central foyer was a display case with gold and silver coins for sale, as if they were pens or tote bags. The Chinese buy more gold than anybody else, recently surpassing India.

I tell you all this to prepare you for this key idea. As CLSA, the Asian investing specialists, put it in a recent report: “The future of Asia is domestic.”

This is an important shift. For a long time now, China’s economy (and Asia’s generally) has been geared toward servicing the West, toward exports. Now begins a transformation, the rise of the Asian consumer.

One key data point here is disposable income. CLSA notes that the number of Asians (excluding Japan) with disposable income of $3,000 annually will rise from 570 million to 945 million by 2015. More than two-thirds of that increase will come from China alone.

As CLSA notes, “The consumption spending of this middle class will rise from US$2.9 trillion to US$5.1 trillion by 2015, with China, India and Indonesia contributing to 69%, 16% and 4% of the increment.” By 2014, about 44% of the population in China will top this $3,000 threshold – a 27% increase over 2009.

These numbers back what I intuitively grasped on my trip. There is a big mass of consumers that want all the things many of us take for granted – like Crest toothpaste and bluejeans and air conditioners. That’s a lot of fresh money in the pool – and companies like Yum! Brands, McDonald’s, Wal-Mart, Carrefour, Starbucks and many others are all jockeying for a share of the prize. And in many cases, they already have substantial businesses here. You can see their presence while you are driving around Beijing.

Servicing this growing middle class is going to be an important investment theme for the next several years.

Chris Mayer
for The Daily Reckoning