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China Week: What Does The Growing Middle Class In China Mean For Companies And Their Stocks?

20 August 2008 5 Comments

Continuing our week-long focus on China, today we will take a look at the growing middle class in China. This huge mass of people that are entering a new level of prosperity has the eyes of companies all over the world. What companies are poised to benefit from this new enormous group of consumers? How can investors target these companies and earn a higher than average return by investing in them? Let’s take a look.

As we have discussed, China is in a period of fantastic economic growth. A very real by product of this growth is that more people are making more money than every before in this country. With a country and population of this size, this is a very large factor in the world economy. The Chinese market is the top focus of countless companies all over the world.

Commodities

First up… commodities. The growth of the Chinese middle class means that more people have a higher quality of life. Typically, this higher quality of life results in more expensive diets. For example, more Chinese are eating more than just rice these days. Americans and other developed countries have enjoyed a diet full of quality beef and other high quality foods and now the Chinese are desiring these things as well. This results in worldwide increase in demand for food.

An additional interesting side note of more beef consumption is a water shortage. It takes much more water to produce beef than to produce agriculture such as rice.

Turning towards energy, as more Chinese increase their lifestyles, expect more Chinese to begin to own cars. Hundreds of millions of Chinese jumping into the automobile market adds a huge amount of demand for energy. Such Fundamentals are very bullish for oil prices.

Travel

As the Chinese grow their middle class, millions will begin to travel. A huge portion of the Chinese population has never left China. Chinese tourism is poised to break out big time. A great company that is poised to benefit this the most is Ctrip.com (CTRP). Ctrip.com is basically the Expedia of China. This is a great growth stock that I have talked about before and recently had a huge pop after solid earnings.

Consumer Gadgets

This giant new group of consumers has companies salivating over the potential growth in China.  One of the consumer electronic companies that I am most interested in when it comes to the Chinese consumer is Apple (AAPL).  The Apple iPhone has already proved to be popular in China, yet the iPhone is not even officially on sale yet!  Apple has recently opened the doors for its retail presence in China and I look for more stores to open all over China.  The future of computing and gadgetry is both convergence and mobility.  China is embracing this future, and the iPhone is the leader of this trend.  As an Apple investor, I am pumped about what China means for this company (and others).

5 Comments »

  • Matt Peer said:

    I think that you should read this article and absorb it before being so bullish on AAPL in China. Until their government is fully democraic and capitalist, with no remnants of the People’s Republic, be careful with China.
    http://seekingalpha.com/article/91731-apple-s-bipolar-china-disorder?source=feed

  • kevin duffey said:

    I have read that article, and feel that the article you reference is rather weak. It presumes that Apple is going to risk the huge profit potential of the Chinese market to make some political statements. You can’t really think they are going to do that. Apple is in business to make money and to lead the global consumer electronics industry. China is a part of that equation.

  • Matt Peer said:

    You misunderstood the context I presented it in. Yes, AAPL is a business. Yes, they are there to make money. But, in light of that, China is still a corrupt regime, as evidenced by the greatest masquerade ball of all time otherwise known as the Beijing Olympics. They still supress free speech. The part of the article that stood out to me was the fact that China just shut down iTunes, with neither AAPL or the Party lending any sort of explanation.

    On a side note, I think AAPL is a great business to invest in, however the only elephant on One Infinite Loop that remains in my book is the state of Jobs’ health. Do they have a clear succession plan? Anytime an analyst makes mention of his health, management says “it’s a personal matter”. Not if a lot of the company’s future prospects hinge on Jobs’ vision.

  • kevin duffey said:

    Matt,

    Good comments. I agree. The jobs health issue is a wildcard. I like to convince myself that there are fantastic people around him that have been just as a part of Apple’s success as Jobs but who knows. Apple refusing to address the health thing does seem a little fishy. We’ll see. For now, keep sellin’ those macs and iphones!