Not Enough Grid, Too Much Lock

by Dan Denning

China is facing an electricity shortfall of 30 million kilowatts. Shanghai, which was lit up like Times Square when I was there in May, has darkened its neon in August.

The Chinese government has scrambled to transfer coal to where it’s needed most to keep factories humming and the lights from going out. But what you’re seeing here is the very beginnings of China’s own era of energy dependence. China needs a lot more energy than it has.

Where will China get its energy…and can you profit from it?

In the meantime, the coal-fired plants are cranking. And this, by the way, is what makes the air quality all over China so lousy. When I was in Nanjing, the air quality was so bad it was a virtual white out of smog. Jiangsu province, where Nanjing is, is the centre of China’s latest industrial revolution.

The air quality problem is real. It will have an affect on public health care costs, if it already doesn’t. It’s also a great gauge of China’s voracious demand for energy. But it shows why Australia is such a desired trading partner for the Chinese.

BHP Billiton looks sure to benefit

This is great news for Australian resource firms like BHP Billiton. BHP reported a 78% increase in annual profits on the back of surging commodity prices and boffo demand from China. BHP produces iron ore, coking coal, and manganese ore, among other products.

BHP is exactly the kind of company that will deliver you profits from China and the commodities boom – without requiring that you own risky Chinese stocks. Just compare BHP to any foreign carmaker that thinks it’s going to get rich selling cars to the Chinese.

Why the Chinese cannot all buy a car

You can do all the market share calculations you want, but there’s one compelling reason why you shouldn’t buy carmakers doing business in China – there’s not enough room in Chinese cities for more cars.

Trust me. I’ve been in traffic jams in Beijing, Shanghai, and Nanjing. China needs more superhighways before it needs more cars. What’s more, at high oil prices, where are Chinese drivers going to find the discretionary income to pay high fuel prices?

True, China’s regulators have just announced some changes that will allow foreign car companies to provide financing to Chinese customers. GM and Volkswagen already have approval set up financing companies in China. Soon Ford will be able to give away cars in China to bad credit risks, in addition to giving those bad credit risks a job in a Ford factory in the US.

Auto-finance deals under a Communist regime

Under the new credit rules, borrowers have to put a minimum of twenty percent down and have a debt-to-assets ratio of eighty percent. But even with those restrictions and the allegedly bright prospects for growth in the domestic market, don’t count on an car sales boom any time soon in China.

More importantly, don’t bother taking the investment risk when you don’t have to. There are plenty of strong China-related investment themes – energy foremost among them – that promise higher profits with less risk.

The Daily Reckoning