Who's Making Money out of China: Cash in on the collapse of the west

published 31 October 2005

A historic shift in global power is currently taking place. It is akin to Alexander the Great sweeping through the Persian empire and establishing a new political reality. The Chinese and Indian economies are growing at rates that may make them the biggest in the world within 20 years. The logic of compound interest is behind this. China has been growing at 7% per annum or more for the last 20 years. At this rate, in 50 years' time its economy will be 32 times its current size, which would mean its GDP per capita would still be lower than the current level in the United States.

These leviathans have a combined population of 2.3 billion. As they make the transition from farms to factories, the output of this vast population grows exponentially, creating the wealth that allows further investment.

But how can investors make money from this phenomenon? It is difficult to buy stocks directly in India. An institution I advise recently had its application to trade on the Indian stockmarket rejected because the forms were filled out in the wrong colour ink. Some firms issue depository receipts, but these can be illiquid and often trade at a premium to the underlying share price. The Chinese stockmarkets have a far-from-encouraging reputation and there are also risks with disclosure and corporate governance.

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I've been managing emerging markets money since 1993 and have to find ways round these difficulties. Some instruments that I use, such as participatory notes in India, aren't available to private investors. However, there are other ways they can gain exposure to these markets. There are lots of funds available, including the Lloyd George Emerging Markets and Eastern Opportunities funds.

Alternatively, there are a number of London Stock Exchange-listed stocks with major Far Eastern exposure. Swire Pacific, Jardine Matheson and Inchcape have significant investments in China with particular interests in Hong Kong and Singapore. So too do the Hong Kong Shanghai Banking Corporation (HSBC Holdings) and Standard Chartered. And it goes much further than this. I find that iron ore stocks in Brazil, copper mines in Chile or aircraft manufacturers around the world can be more affected by events in China than by their own domestic market. This is true for India as well, where cost savings achieved by moving back office functions, such as call centres, to the sub-continent, have powered earnings for Western companies that have no top-line growth. Among British-listed companies, Anglo-American and BHP Billiton have profited from the rise in commodity prices driven by Chinese demand. Gold would be an enormous beneficiary of this, both because of the weakness of the dollar and an historic Chinese affection for hard money. All investors ought to have at least 5% of their funds in gold or gold mining shares.

The most direct opportunities in any market tend to be the first to rise. That is why it is important to look beyond stocks traditionally identified with Asia, and instead look at other companies whose growth prospects are driven by this emerging-market miracle.

As a positive view on these markets becomes more common, so too does the risk of having missed the boat. Share prices pre-empt trends rather than following them. Moreover, the consensus is often wrong and the result of lazy thinking. Yet, in my view, this is not so much a trend as an earthquake shifting the tectonic plates of political and economic power - a threat that the West has not seen the like of since Suleiman the Magnificent reached the gates of Vienna in 1529.