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Do you remember the gasps when the Japanese were snapping up some of America’s most-loved landmark properties during the 1980s?
Back then, the business news almost always included a segment about the Japanese buying an American icon, whether it was Pebble Beach, Columbia Pictures, or the Rockefeller Center.
And if the news wasn’t about the Japanese buying something, it was about them building factories in places like Smyrna, Tennessee (Nissan).
When this was happening, I was working at Merrill Lynch. And I remember teasing my co-workers that they had better be nice to me because one of my Japanese uncles might soon become their new boss.
The Japanese buying spree was a function of the country’s great prosperity. Throughout the 1970s, Japan consistently had the second-largest GDP and one of the highest per-capita incomes in the world.
These days, the Japanese are no longer the heavy hitters they used to be. However …
The Chinese Are Picking Up
Where the Japanese Left Off
State-run China National Offshore Oil Company (CNOOC) tried a hostile takeover of Unocal in 2005. CNOOC eventually abandoned its $18.5 billion bid for Unocal, but that was just the first salvo …
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| The Lenovo-IBM deal is just one of many Chinese buyouts in recent memory. |
How about Lenovo’s purchase of IBM’s personal-computer division for $1.75 billion?
How about Haier’s attempt to buy Maytag for $1.3 billion?
Or the Chinese government’s $3-billion investment in the Blackstone Group?
China isn’t restricting itself to just the U.S., either. Chinese companies bought 40% of the Northern Light oil sands project in Canada … 10% of an Azerbaijan oil field and pipeline … and invested billions in Venezuela to get some of the crude oil that was previously going to the U.S.
The Chinese aren’t just buying businesses — they’re buying skyscrapers, shopping malls, farms, forests, ski resorts, vineyards, refineries, and mineral deposits.
And they are merely getting warmed up!
Another Two Significant Marriages
Taiwanese personal computer giant Acer bought Gateway Computer in 2007 for $710 million. Treated as a combined company, the two should have $15 billion in sales and ship 25 million PCs. The Gateway purchase will dramatically increase Acer’s U.S market share to 10.8%.
Hewlett-Packard and Dell, which control about 52% of the U.S. PC market, better watch out. Between Acer and Lenovo, I foresee nothing but shrinking profit margins for the two American giants down the road.
Separately, a Chinese company announced its interest in buying Seagate Technology, one of the only two computer disk drive makers in the U.S.
IBM sold its disk drive business to Hitachi in 2002, and Fujitsu and Toshiba are the other major players. So a Seagate takeover would definitely put Asia at the top of the PC food chain.
Why the Current Chinese Buying Binge
Is Very Different from the Japanese Spree
I see at least three important differences this time around:
First, the Japanese companies doing all the buying were privately owned; many of the Chinese buyers are state-owned and state-run.
Second, Japan is a democracy; China is not.
Third, and most importantly, Japan was not buying strategic resources like oil and natural gas; China is.
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| China will need plenty of natural resources to fuel its construction boom. |
This has broad implications for investors smart enough to put that knowledge into action. So, how can you use this to make money?
I am confident that the Chinese will continue buying access to the raw materials they need to fuel and support their rapidly expanding economy.
I’m talking about:
Energy, such as oil, natural gas, and coal
Metals, like aluminum, copper, and steel
Foods, including pork, poultry, and agricultural products
Construction materials, such as cement, timber, heavy equipment
So, it does’t take much homework to come up with a list of companies that are probably sitting on resources that the Chinese want.
China’s Boom Over?
Some backseat experts may say that China’s boom is over. My reply: Ha! Not by a long shot! China’s economic rocket ride higher is far from over, and I think there are oodles of money to be made playing this giant as it continues to awaken — and shakes the world!
First, let’s look at six of the recent economic stats coming out of China …
#1. While the rest of the world is in the midst of a severe credit contraction, bank lending in China grew by a whopping 22% in January 2008 — the same rate of loan growth of a year earlier, when the Chinese economy grew 12%.
#2. In contrast to past brisk lending, much of the bank lending this time is not going toward overinvestment. Rather, up to 60% of it is going to small business enterprises and consumers. This indicates that domestic consumption in China is on the rise, a precondition for an even stronger economy.
#3. Retail sales during the Chinese New Year holiday shot up 16.8%, and that was in the midst of the coldest, nastiest winter weather in 54 years!
The booming sales weren’t just in the major, east coast cities like Shanghai, either. Retail sales soared 35% in both Chongqing and Anhui provinces, proving that China’s boom is beginning to spread westward to the rural areas.
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| Chongqing’s port is bustling and retail sales are soaring! |
#4. China has overtaken the United States to become the world’s second-largest consumer of gold jewelry, with sales jumping 34% in 2007. That’s even more impressive when you consider that only about 10% of the country’s population is currently able to afford gold.
#5. China’s trade surplus with the world is expected to jump 22.2% in 2008. But even so, the role of exports in China’s economy is shrinking as domestic consumer demand ramps up, accounting for as much as 80% of recent gross domestic product growth.
#6. Capital investment continues to surge in China, despite six interest rate hikes last year and 11 jumps in bank reserve requirements since the beginning of 2007.
I could keep going, but I think you get the picture. There is no slowdown in China. And when you consider what they have planned next, you’ll see why I’m convinced that the boom is going to spread throughout ALL of mainland China …
The World’s Largest Infrastructure Projects
Are Now Underway In China
So far, China’s record-shattering growth has largely been concentrated on its east coast. Some 40 million rural residents migrate to the east coast cities each year, creating a boom never before seen in the history of the world.
But there are still some 800 million Chinese residents living in rural areas. And while the east coast cities are now some of the largest in the world, with extensive infrastructure, the rural countryside remains largely undeveloped.
Over the next five years, Beijing will …
- Spend up to $200 billion on railways stretching west — four times more investment in railroads than has been made in the past four years.
- Spend $30 billion to connect Beijing with Shanghai via a maglev bullet train that can travel at speeds of up to 300 mph, cutting the travel time between the two cities in half.
- Build more than 10,000 miles of new expressways, reaching west into rural China.
- Build 97 regional airports at an estimated cost of $62.5 billion.
- Invest roughly $40 billion in 15 cities to construct subway systems.
All told, I figure some $400 billion will be spent on new infrastructure projects in China in the next five to seven years …
That $400 billion will turn into more than $2.8 trillion of economic production by the time it multiplies through the banking system via additional lending …
And not one yuan of this includes the hotels, convenience shops, gas stations, or toll road pit stops that will spring up along these new routes!
Slowdown in China? Heck no! The boom continues in the major cities, and now, the boom will spread through the rest of China!
Look …
China’s Economy Is Unlike
Any Other in World History
There has never, I repeat, never been an economic phenomenon like China. The sheer size of the population, currently at 1.4 billion, makes it unlike any other economy the world has ever seen.
But it’s not just sheer numbers. It’s also the Chinese people and their culture. China has intense nationalistic pride … fanatic devotion to the concept of family … and one the toughest work ethics you’ll find anywhere.
Think about it. When was the last time you saw a local neighborhood Chinese restaurant or dry cleaner go out of business?
Probably never. They don’t go out of business. No matter how tough things get, they hang in there, often calling in more family members to help, until the business bounces back. The failure rate of Chinese businesses is among the lowest of any culture or economy on the planet.
As for the pundits on Wall Street who believe China’s economic growth has peaked? Don’t believe them for one minute. Most of these armchair analysts have never even stepped foot in China.
My view: China will shock the world again with stronger than expected growth in 2008.
