China's Transformation Into A Consumer-Driven Economy

Sean Brodrick

It is an old statistic but one that investors should never forget: Roughly 70% of the U.S. economy is comprised of consumer spending. That is the money that you and I spend at the grocery store, the shopping mall, at car dealerships, and at our favorite restaurants.

The problem for the U.S. economy is that 'we' aren't spending much.

Retail sales in June were $387.8 billion, according to the Commerce Department. That's a pathetic 0.1% increase from the previous month.

Six of 13 major categories showed a decline in sales last month. Gas stations led the way, falling 1.3% ... furniture/home furnishing, dropping by 0.8% ... leisure goods (sporting, book, music stores), decreasing by 0.7% ... and restaurants, losing 0.4%.

That lack of spending is the result of a combination of weak housing prices and the unemployment rate remaining stubbornly above 9%.

The latest Bloomberg Consumer Comfort Index shows that only 8% of Americans characterized the economy as positive. Even Ben Bernanke recently admitted to the Senate Banking Committee that "confidence is pretty low" among consumers.

The Wall Street crowd and CNBC experts keep telling you that things are going to get better, but I sure don't see it.

But maybe I'm wrong. Maybe the Obama administration will stop spending money it doesn't have, Ben Bernanke will stop printing money, and the U.S. economy will bounce like a Super Ball.

The Asian Investment No-Brainer

The way I look at it, you can cross your fingers and hope that our consumer-lead economy rebounds ... OR ... you can invest someplace where the consumers are happy, confident and spending.

I'm talking about Asia in general and China is particular.

Here is a short video clip I took last week at the downtown Kuala Lumpur Sogo store, a popular, Asian high-end department store. As you can see, it is PACKED with shoppers!

That same spendathon can be found all over Asia, including China.

FACT: China's retail sales increased 16.8% in the first six months of 2011 and by 17.7% in the month of June.

There is simply no comparison to the measly 0.1% increase in the United States. Obama and Bernanke would do CARTWHEELS if the United States were enjoying a fraction of that prosperity.

The confirming signs of prosperity in China are easy to find. In just the last couple of days:

Sure Sign #1: Apple has been on a big-time roll, and a large part of its success is booming sales in China. Apple just reported that its greater China (China + Hong Kong + Taiwan) sales increased by more than 600% in the last quarter to $3.3 billion.

Here's what Apple COO Tim Cook said about his company's sales in China:

"China was very key to results. The region now contributes roughly 13.3% of Apple's total third-quarter revenue of $28.57 billion, compared to less than 4% in the year ago quarter.

"This has been a substantial opportunity for Apple, and I firmly believe we are just scratching the surface right now."

Sure Sign #2: CapitaMalls, the retail arm of Southeast Asia's biggest developer CapitaLand, reported a 100% increase in quarterly profits, jumping from $82.1 million (Singapore dollars) to $164.9 million. How? From rising traffic and sales at its shopping malls in China.

Sure Sign #3: Luxury goods company Burberry reported a 34% sales increase for its most recent quarter thanks to a 60% jump in Asia-Pacific sales. Burberry opened 50 new retail stores in China in the last 12 months.

Sure Sign #4: General Motors reported a new all-time high of 1.27 million autos sold in China for the first six months of this year.

Sure Sign #5: Yum! Brands, the operator of Pizza Hut and KFC restaurants, has more than 18,000 locations outside the United States.

The company attributed its 18% increase in China sales as the reason it beat the pants off of its quarterly profit forecasts. Business in China is so good that Yum! Brands opened 90 new restaurants in the last 90 days.

I could tick off another dozen examples, but I think you get the point. More importantly, the strong consumer spending in China, if anything, is going to get even better.

A recent Boston Consulting Group report forecasts China's fashion market to triple in size to more than $200 BILLION over the next 10 years.

"Per capita consumer spending in China is still in the early part of the penetration curve compared with that in mature markets, giving China the potential to become an even more significant fashion market," the report said.

China's Consumer Revolution
Isn't An Accident

The Chinese economy is undergoing an intentional MONUMENTAL transformation from an export-dependent manufacturer of low-margin trinkets to a consumption-driven economy powered by its own internal growth.

China's leaders don't like being dependent on the west for its exports, so it is intentionally focusing on growing its internal domestic demand.

China's 12th Five-Year Plan (2011-2015) prioritized more equitable wealth distribution, increased domestic consumption, improved social infrastructure, and social safety nets. The plan is representative of China's efforts to shift its emphasis toward domestic consumption.

You see, wages in China have been growing by around 12% a year in real terms over the last decade. That is making Chinese exports more expensive, especially compared to other lower-wage Asian neighbors like Vietnam and Cambodia.

Just like the United States lost factories to lower-wage China, China is now losing some of that low-margin, labor-intensive, export-oriented manufacturing that had been the base of its economic growth over the last 20 years.

I saw the proof with my own eyes during my last visit to Yue Yuen Industrial Holdings, the largest branded athletic shoe manufacturer in the world. It produces tennis and casual shoes for Nike, Adidas, Reebok, Asics, New Balance, Rockport, Timberland, and Puma.

I learned that this Chinese company was moving some of its manufacturing facilities to Vietnam to save on labor costs.

The Wall Street Crowd
Doesn't Get It

The Wall Street crowd doesn't get this shift. For example, when the HSBC China Manufacturing Purchasing Managers Index fell to 48.9 in July, my clueless competitors assumed that this was a sure sign that the Chinese economy was headed for a painful fall.

Wrong! The manufacturing sector is slowing down, but the consumer sector is more than making up the difference. If you understand that simple yet key concept, you won't have any trouble finding great stocks to invest in.

What you need to do is get 'long' whatever the Chinese are buying. And when it comes to Chinese consumers, all it takes is a walk down any major street to see what's hot.

I see more Louis Vuitton handbags in Beijing than I do in Boston. I see more Apple iPhones glued to ears in Shanghai than in Seattle. And I see more customers lined up at KFC stores in Hong Kong than in Houston.

Those are just a few of the examples of western companies that are doing gangbuster business in Asia and carting wheelbarrows of profits to the bank.

If you're more of an exchange traded fund (ETF) kind of investor, here's one worth your consideration: The Global X China Consumer ETF (CHIQ). CHIQ is packed with China's most successful retailers.

Don't make the mistake of investing in any stocks that are dependent on the U.S. consumer to bail them out. It ain't going to happen.

What you need to do is invest where the shopping malls are packed and the consumers are confident, happy, and spending. That, my friend, is across the Pacific Ocean.

Best wishes,

Tony

P.S. If you haven't seen my video event on hidden Asian profit opportunities, then you're doing yourself and your loved ones a disservice. The investment analysis, strategies and reasons I give you in the video are invaluable, and quite simply, they could make your entire year for you.

Click here and it will begin playing immediately.


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Posted 07-29-2011 12:23 PM by Tony Sagami