China is the world’s 2nd largest economy, with a population of over 1.3 billion and an annual GDP growth rate of more than 10% over the past 5 years. China’s GDP is expected to continue to slow in the next few years, albeit at the high rates of 7-8%. There are opportunities for companies to invest in China to capture some of this growth for its own profits. Some of these companies can also become good investments for investors. Where and How can we invest in China profitably?
Key Trends in China
First, let us look at the key trends in China to help us determine where to invest in China. The relevant key trends in China that are likely to persist include:
a) Infrastructure Development. Urbanization in China will continue to increase, fueling the need for infrastructure development. Infrastructure spending on power, utilities, roads, rails, ports, housing and other large projects has been high and growing over the past few years. There is still room for infrastructure expansion in China, especially in the western and inland provinces. This implies continued growth in the natural resources (such as metals, steel and oil & gas), energy, construction, and transportation sectors.
b) Rising Incomes. The rising incomes of the Chinese people will increase domestic consumption and provide potential for growth in sectors such as travel/tourism, telecommunications, real estate construction, consumer goods, automotive, e-commerce and financial services. The rising incomes also can result in an increasing willingness and ability to pay for utilities and also environmental protection.
c) Increasing Environmental Emphasis. Due to the increasing environmental awareness among the public and the growing public dissatisfaction with industrial pollution, the government cannot afford to ignore the environmental impact of its industrial growth. For example, 12th Five-Year Plan already emphasizes “balanced growth” instead of growth at all costs in previous plans. However, it is less clear how much and how quickly this would translate into actual results on the ground.
Next, let’s look at the priorities of China’s government over the next few years. The Chinese government maps out a plan every five years (i.e. the Five-Year Plan) as a developmental blueprint to guide policy and set targets for central and local governments and ministries, as well as state-owned enterprise (SOE) and private sectors. Under the 12th Five-Year Plan (2011-2015), the focus is on “balanced growth”, which reduces target GDP growth to tackle social inequality and shifts the economy towards increased domestic consumption. Environmental protection is also high on the priority list.
The overall themes of the 12th Five-Year Plan include domestic innovation, environmental protection, modernization, standardization, intellectual property rights (IPR) protection, research and development, safety and security. The 12th Five-Year Plan also includes 7 strategic industries that the government will focus on, namely:
(i) Biotechnology & Biomedicine
(ii) High-end Manufacturing
(iii) Non-fossil Fuel
(iv) Clean Energy Vehicles
(v) New Materials
(vi) Environmental Technology
(vii) Next-generation Information Technology
Investing in China: Where?
The intersection of the trends of increasing infrastructure development and increasing environmental emphasis, and the government priority areas under the 12th Five-Year Plan indicate that there are potential growth areas in high-end environmental technology or infrastructure, including in clean energy. Foreign private enterprises with the necessary technology would also have the opportunities and competitive advantage to enter or grow in the sector in a significant way.
Investing in China: How?
With the above in mind, we can look at companies that have (or plan to have) presence in China in the area of high-end environmental technology or infrastructure (which can be related to clean-tech and renewable energy, depending on what you mean by these terms). These could be companies from US or Europe or other countries that invest in China. As for Chinese companies, we do need to be more careful as there had been accounting scandals, corporate governance issues and political agendas associated with them.