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China Trading Places with U.S. As Economic Super Power

Economics / China Economy Sep 16, 2009 - 11:07 AM GMT

By: Tony_Sagami


Best Financial Markets Analysis ArticleHere’s a headline that broke my heart when I read it last week: “U.S. Poverty Rate Hits 11-Year High.”

The U.S. Census Bureau reported that a sad-but-true 13.2 percent or 39.2 million Americans are living below the poverty line, defined as less than $22,025 for a family of four. That’s the highest rate since 1997.

And one in five American children under the age of 18 is living in poverty.

Worse yet, those numbers have certainly grown since the data was collected in the spring and millions more Americans have lost their jobs.

Those job losses have translated into a decline in median household incomes, which dropped by 3.6 percent to $50,303. That’s the largest one-year income decline … EVER.

Anyone who thinks that consumers will rescue our economy from this recession is nuts. Plunging home values and stock prices have fueled a record $13.9 trillion loss in household wealth in the United States since the middle of 2007.

A Different Story

That’s quite a contrast from what’s going on in China. The Chinese National Bureau of Statistics released a couple of statistics last week that really caught my attention:

arrow Trading Places — China Rises As U.S. Stumbles  Manufacturing output in August at China’s factories grew by 12.3 percent compared to the same period last year. That’s a big improvement over July’s 10.8 percent increase and above expectations. The prosperity was widespread, but two standouts were steel output (up 29 percent) and auto production (up 90 percent).

arrow Trading Places — China Rises As U.S. Stumbles  Investment in factory equipment and construction, commonly called “fixed investments,” rose by 33 percent in the first eight months of 2009 to $1.65 trillion.

arrow Trading Places — China Rises As U.S. Stumbles  Retail sales climbed 15.4 percent in August from a year before and the best monthly number we’ve seen this year. The strongest sellers were buildings and decoration materials (up 36.6 percent), automobiles (up 34.8 percent), clothing (up 23.3 percent), daily consumer products (up 15.6 percent), and grains and edible oils (up 12.7 percent).

August wasn’t an aberration, either. In the first eight months of this year, retail sales have grown by 15.1 percent.

The reason for these rising sales is simple: Incomes are growing in China.

FACT: China’s per capita income is 108 times higher today than it was in 1949 when the Communists took over.

To put that into perspective, it took Great Britain almost the entire 19th century to raise its per capita income 2.5 times, 60 years to raise its per capita income 3.5 times in the U.S. from 1870 to 1930, and Japan took 25 years, from 1950 to 1975, to increase its per capita income 6 times.

China went through three distinct stages to accomplish that prosperity: 1. Collectivism: From 1949 to 1965, farmers were encouraged to “become better off through one’s own labor” and the government promoted “collective prosperity.” 2. Cultural Revolution: From 1966 to 1976, when the country was ravaged by the Cultural Revolution, “personal affluence,” or building up one’s own family fortunes, was strictly forbidden. 3. To Grow Rich Is Glorious: After China’s reform and opening-up in 1978, the chief architect of the country’s reform, Deng Xiaoping, called for “allowing and encouraging some people and areas to get rich first,” which was leading to common prosperity and would ultimately usher in the unprecedented economic growth China is enjoying now … but it is going to get even better.

Roughly one-third of China’s 1.3 billion citizens are now considered to be middle class. Better yet, the number of Chinese middle class is expected to increase by another 70 percent by 2020.

Don’t faint, but middle class in China is generally defined as $3,000 of annual income. That may sound like peanuts to you and me, but it is the point where households begin to buy non-discretionary items beyond food and housing.

By the way, the Chinese character for “affluence,” or “fuyu,” is formed by components meaning “having a full stomach” and “having foods and clothes.”

That affluence has translated into big sales of things like cell phones (China Mobile: CHL), prescription drugs (China Nepstar: NPD), vacations (Home Inns: HMIN and China Eastern Airlines: CEA), more meat (Zhongpin: HOGS), video games (Perfect Word: PWRD), life insurance (China Life: LFC), and English lessons (New Oriental Education: EDU).

In fact, China Mobile has one of the most lucrative business models I have ever seen. One of China Mobile’s divisions sells 800 million products a day and gets paid roughly one penny for each of those 800 million products. Look, 800 million times anything — even one stinking penny — is a bundle of money.

Better yet, this business gets paid those 800 million pennies every day of the year! No matter how you slice it, 800 million X one penny X 365 days = a mountain of money.

Wait … it gets even better. This company is adding a couple million new customers each and every month and that 800 million daily number keeps growing … and growing … and growing.

And get this — that mountain of repeat business is only 10 percent of this company’s sales.

The Thumb Culture — and the Fortune to Be Made by Serving Them

This product is so popular and pervasive with teenagers and young adults that its use has generated its own nickname: The thumb culture. The thumb culture?

You can see the thumb culture in action at subways, lecture halls, coffee shops, restaurants, and airports, franticly using their thumbs with remarkable dexterity to type messages and surf the Internet on tiny hand-held electronic keyboards.

The thumb culture is becoming so prevalent that there has been a surge in the number of tenosynovitis cases, a repetitive strain injury from excessive typing on miniature keypads.

What I’m talking about is text messaging, also known as SMS (Short Messaging System). Because of instant delivery and low cost, text messaging has rapidly become a wildly popular means of communication among young people.

If you’ve ever watched American Idol, you’ve heard host Ryan Seacrest urge viewers to text message their vote for their favorite contestant.

Text messaging is very popular in America, but one country sends more text messages than anybody else in the world: China.

One out of every two SMS text messages sent in the world are sent in China. Typically, the cost of a text message in China costs about 10 fen (or one cent) to send a text message in China, so we’re talking about a mountain of money.

For investors, that gargantuan growth spells O.P.P.O.R.T.U.N.I.T.Y.!

That is why I consider China Mobile to be the very best cell phone company in the world. That doesn’t mean you should rush out and buy, though. My Asia Stock Alert subscribers already sold China Mobile for a whopping gain and we’re waiting for it to get cheaper before we jump back in.

Nonetheless, China Mobile is prospering along with the Chinese citizens themselves and, unlike the sad trend in the U.S., incomes are rising … not falling.

So you need to ask yourself — should you keep the majority of your equity dollars in a country that is struggling, shrinking … or would it be more productive to invest where the economy and its citizens’ incomes are rising?

The answer is clear and across the Pacific Ocean.



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