China's Biggest Investment of All

Larry is recovering from a minor surgery today. The poor guys in pain right now, more than the doctor promised. But dont worry. Hell be fine in a couple of days.

Since he and I work so closely together, I volunteered to cover for him today … starting with an interesting question for you:

Do you know where China puts most of its overseas investments (outside of buying U.S. Treasury bonds to prop up the ailing greenback)?

No, its not Japan or Thailand or anywhere in Asia. Its Latin America. The facts …

Fact #1. Latin America recently surpassed Hong Kong as the largest recipient of overseas investment from China. China invested $889 million in Latin America in the first 11 months of 2004, accounting for more than 49% of Chinas total overseas investment. Thats much more than Chinas investment in Asia ($515 million) or Europe ($296 million).

Fact #2. Tilting the flow of money in Latin Americas favor is that most of Chinas overseas investment (51%) is in the mining industry.

With an economy geared for manufacturing and growing at close to 10%, China is Tony-the-Tiger hungry for resources, and Latin America is a good place to get them.

Fact #3. China is already the worlds largest consumer of iron ore, steel and copper. It sucks up half of the world’s supplies of cement, a third of its coal, and more than a third of its steel.

And dont get me started on China and energy. China has accounted for 40% of global growth in the oil demand in the last four years, according to the US Department of Energy, and its consumption over the next 20 years is projected to rise to 12.8 million barrels a day from 5.6 million barrels currently.

Driving that oil consumption is a population of 1.4 billion transitioning from bicycles to scooters to automobiles. More than 4.5 million new cars hit Chinese roads in the past year alone.

So, to make sure it has plenty of copper, steel and energy, China is walking through the resource-rich countries of Latin America with a blank checkbook, and its buying all the raw materials it can lay its hands on.

I can attest to this from personal experience. In June of last year I stood at the edge of the Panama Canal and watched one container ship after another parade through, stuffed with Brazilian raw materials on their way to the Far East. China buys huge quantities of Brazilian bauxite, iron, zinc, soy and lumber.

Fact #4. Chinas trade with all of Latin America is booming. In 1975, total trade between China and Latin America was just $200 million.

In 1998, it had reached $2.8 billion.

By 2004, it climbed to over $36 billion, THIRTEEN times more.

And the best guess is that in 2005, trade between China and Latin America jumped well over $50 billion.

Deals, Deals and More Deals

That trade was helped along by a 2004 visit to Latin America by China President, Hu Jintao.

He toured Brazil, Argentina, Chile and Cuba, signing 39 bilateral agreements to improve trade, tourism, and more.

Then in 2005, Chinas Vice President, Zeng Quinghong, traveled to Venezuela, Mexico, Peru, and a host of other Latin American and Caribbean countries, negotiating new trade and investment agreements every stop along the way.

These are just SOME of the deals China is working on in Latin America right now

China will invest $500 million in a Cuban nickel plant and prospect for nickel throughout Cuba. (Cuba is a big source of nickel, as well as supplying 10% of the worlds cobalt).
Minmetals, a Chinese mining company, is making plans to open a huge new copper mine in Chile.
Petrleo Brasileiro (Petrobras), Brazils state-owned oil company, has inked a deal to sell China 12 million barrels of crude oil. The deal is worth $600 million a year, and Petrobras hopes to expand it to $1 billion a year.
Peru signed an $83 million contract with China National Petroleum Corporation allowing the Chinese firm to explore for oil in the country’s southeastern rainforests.

The biggest relationship of all?

Two of the worlds largest countries in the world: Brazil and China.

The sign: Their leaders, Luiz Incio Lula da Silva and Hu Jintao, are coming together like a Roosevelt and Churchill to establish a political, economic and financial alliance to challenge the U.S., Europe, Japan and Russia.

Overall, Chinas imports of raw materials from South America are expected to reach the $100 billion-per-year mark by the end of this decade. China is already Brazils third-largest overall trading partner and Argentinas fourth largest.

Speaking of Brazil, during his visit, China President Hu offered $7 billion in port and railway improvements to Brazil. China is also building the worlds second largest dam in the Brazilian Amazon. The energy from that dam will go to power mines that provide raw materials to China.

And then theres Venezuela. That countrys love-hate relationship with the United States is too troubled and twisted to get into here, but lets just say its worthy of a Jerry Springer episode.

Venezuela ships more than 60% of its crude oil production to the U.S. And Venezuelas President, Hugo Chavez, hates George W. Bush with the white-hot intensity of an equatorial sun. So whos the winner in this no-love-lost mismatch? You guessed it China!

Chavez is determined to find other customers besides the U.S. for his oil and gas. So, he signed a series of agreements with China in 2004. Now, Venezuela’s oil company, Petrleos de Venezuela (PDVSA), is exporting 140,000 barrels a day to China and aims to more than double that amount to 300,000 barrels.

As a result, Venezuelas trade with China will probably hit $3 billion in 2005 more than double the level of 2004.

In those same 2004 agreements, Venezuela gave Chinese firms the green light to develop 15 mature oil and gas fields in Venezuela. These fields have reserves of more than a billion barrels.

In Beijing in December 2004, Chavez told reporters, a large part of that oil will come to China. Chavez also pledged to support Chinese companies’ involvement in the exploration of Venezuelas off-shore natural gas fields.

Along with Ecuador, Brazil and Venezuela, energy-hungry China also has cast lusty eyes on Bolivia, where President-elect Evo Morales has invited China to help develop his country’s vast gas reserves after his government carries out plans to nationalize them.

I think the U.S. should be concerned about the deals that China is making in Americas backyard. But thats a topic for another day. For now, lets focus on the fact that Chinas lust for natural resources is making Latin America red-hot for U.S. investors, and its going to get red-hotter.

Latin Americas economy may have grown by only 4.3% in 2005. And that may be below the 5.7% average of all developing countries (and far below Chinas 9.8% growth for that matter).

But, heck! Morgan Stanley’s weighted measure of regional stocks, the MSCI Latin America index, soared 45% in 2005 in dollar terms. Thats even better than the previous year’s increase of 39.4%. And its bound to get even better as more China deals spur growth at a faster pace.

Why is money pouring into relatively lackluster economies? Because the smart money knows that these economies have bottomed, theyre going to ride the global commodities boom for many years to come, and a lot of stocks in Latin America are cheap, cheap, cheap!

How to Invest in the
China-Latin America Play

There are several vehicles you can use to take advantage of the big boom were going to see as more Chinese money pours South of the Border:

Vehicle #1 Fidelity Latin America Fund (FLATX). Morningstar gives this fund a four-star rating. It returned over 51% in 2005 wow!

In addition, 21 percentage points of the funds total returns for the year came in the last three months double-wow! This fund is on fire.

The fund has a total expense ratio of 1.16%, compared to a category average of 2.10%. Theres no front-end or back-end sales load.

And its portfolio has some excellent companies, including America Movil, Cemex, Petrobras and Wal-Mart de Mexico.

Among its equity holdings, the average price-to-earnings, price-to-book and price-to-sales are all better than the category average. So it should keep outperforming.

Vehicle #2 iShares Brazil (EWZ). If you want to focus on one Latin American country that should reap a whirlwind of profits from China, this exchange-traded fund may be what youre looking for.

EWZ was also up over 51% in 2005, and has a total expense ratio of just 0.74%. Its holdings include Banco Bradesco, Companhia Vale do Rio Doce (one of the worlds biggest and best natural resource companies), Petrobras, Tele Norte and Unibanco. 34% of its holdings are in materials, and 36% in energy a good mix for a China play.

Vehicle #3 leading natural resource stocks. If you can pick the right ones, you can greatly outperform the mutual funds. So if you havent done so already, nows the time to subscribe to Larrys Real Wealth Report.

I know of no one else whos done a better job not only picking the right stocks, but providing the best timing … while at the same time … protecting your capital. For just pennies a day, you cant go wrong.

Vehicle #4 Natural resource small-caps. Other than options, this is where you can get the biggest bang for your buck.

Good luck and good trades!

Sean

About MONEY AND MARKETS

MONEY AND MARKETS (MAM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Larry Edelson, Tony Sagami and other contributors. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MAM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MAM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Contributors include Marie Albin, John Burke, Beth Cain, Amber Dakar, Michael Larson, Monica Lewman-Garcia, Julie Trudeau and others.

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