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Most economists agree that, over the long run, the U.S. economy is likely to post GDP growth of around +3% annually. That's very respectable for a large, developed economy. After all, with a total GDP of more than $10 trillion, that type of expansion rate represents more than $300 billion in annualized gains. To put that number into perspective, consider that Belgium's entire annual GDP is only $316 billion. Meanwhile, Switzerland's annual GDP sits at just $252 billion.
Countries normally grow fastest during the early stages of their economic development. A century ago, for example, it wasn't unusual for the U.S. to deliver real economic growth of close to +10% per year. As the country moved from being a primarily agrarian society to a global industrialized power, U.S. manufacturing, industrial and eventually service-sector businesses blossomed. These industries, in turn, paid out higher wages that led to the emergence of a large middle class and the development of a powerful consumer sector. Imagine the gains you would have enjoyed if you had invested in the U.S. early in its development, just as the country's economic growth rate was accelerating. The potential returns for investors during this high-growth phase were enormous. But investors don't have to just imagine that scenario -- today's emerging markets offer growth potential every bit as strong as the U.S. market did a century ago. And as we all know, China remains far and away one of today's most exciting growth markets.
Growth Sustainability Furthermore, China is undergoing a period of rapid urbanization. In 1952, China's urban population stood at just 12.5% -- meaning nearly 90% of all inhabitants lived in rural areas. And by 1980, nearly 30 years later, that figure still stood at less than 20%. However, by 2004 China's urban population was already pushing 40% and was growing faster than ever before -- more than double the 1980 level. This urbanization reflects the emigration of China's farmers into urban areas in search of higher-paying jobs in China's manufacturing industries. China's exports have blossomed in recent decades and the nation has become a key manufacturer of all sorts of goods, ranging from basic plastic parts to complex electronics.
Buying China -- Invest in mutual funds or
ETFs that have exposure to China The advantages of a Chinese-focused mutual fund are clear. Funds offer broad diversification and access to a host of companies that would be difficult for individual U.S. investors to buy directly. For example, many of China's best placed companies trade in Hong Kong but do not trade in the U.S. as ADRs. What's more, it's extremely expensive for individuals to trade stocks listed in Hong Kong. However, funds can offer easy access to this market. One of my favorite funds is the iShares FTSE/Xinhua China 25 Index Fund (FXI). This exchange-traded fund (ETF) concentrates its assets in China's largest and most liquid stocks. In addition, in the table below you'll find a handful of other mutual and closed-end funds that offer broad exposure to Chinese equities.
And, of course, Chinese companies won't be the sole beneficiaries of China's economic growth and development. In an increasingly globalized world, thousands of foreign firms will benefit from a chance to sell their wares to a sizeable and growing Chinese middle class. Fortunately for U.S. investors, a number of American firms were among the first to delve into the Chinese market in a big way. In my table below, I list a number of American companies that have established solid operations in China and should benefit from future growth in the region. But there's even better news for U.S. investors. Over the past five years we've seen an explosion in the number of Chinese and Hong-Kong based companies that have listed on the U.S. exchanges as ADRs. The table below offers a detailed list of all Chinese companies that trade in the U.S. And in the text that follows, I profile two of my favorites from that list. Editor's Note: To view the remainder of this article, in which StreetAuthority.com founder Paul Tracy and his staff provide a table of several dozen high-quality Chinese stocks that trade on one of the major U.S. exchanges, as well as in-depth profiles of their two favorite companies from this list, you'll need to subscribe to our premium Market Advisor newsletter. Please visit one of the following links to continue... Good investing!
Paul Tracy founded StreetAuthority and became Editor in Chief in 2001. Prior to that he spent several years as Managing Editor at a multi-million dollar financial publishing firm with over 150,000 subscribers. In addition to his role as managing editor and lead financial writer, he was also responsible for equity research and managing a team of seasoned professional financial writers, researchers and market commentators. Paul's previous experience includes a position at Robert W. Baird & Co.'s full-service brokerage operations as well as economic research work on a Money and Banking project funded by the National Bureau of Economic Research. He has also spent time doing outside consulting and research for the University of Virginia, has appeared as a guest expert on several prominent financial radio shows, and has been a featured speaker at various investment conferences across the U.S. Paul graduated with a B.S.
in Finance and Management from the McIntire School of Commerce at the
University of Virginia.
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As
you can see in my chart, China's GDP growth has averaged close to three
times that of the U.S. over the past decade. That's not to say that
China is wealthier than the U.S. -- in fact, U.S. GDP per capita
currently stands at a little over $40,000 per person, more than 7 times
higher than China's $5,600 (including wealthy Hong Kong). But China is
starting to undergo the same rapid transformation from economic
backwater to a modern industrial power. Eventually, China may reach a
wealth level similar to what prevails in the U.S. or Western Europe, and
at that point its tremendous economic growth will likely slow. However,
even if that scenario does unfold, that's still decades away; average
growth in China will likely continue to trend higher than in the U.S.
for years to come.
That
burgeoning export trade has also significantly bolstered China's middle
class. Rising wages for higher paying manufacturing jobs have led to
greater domestic consumption. For example, as my chart illustrates,
Chinese automobile sales have risen more than fourfold since 2001 alone.
This is a sure sign that China's consumer sector is on the rise.
