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Customers queue to buy food during the opening ceremony of a newly-renovated McDonald's restaurant to mark the 20th anniversary of McDonald's in China, in Beijing December 15, 2010. McDonald's Corp plans to increase its investment in China by 40 percent in 2011, primarily by opening 175-200 new restaurants in the country, the company said in a statement on Wednesday. (© Petar Kujundzic / Reuters/Petar Kujundzic/Reuters)
Customers queue to buy food during the opening ceremony of a newly-renovated McDonald's restaurant to mark the 20th anniversary of McDonald's in China, in Beijing December 15, 2010. McDonald's Corp plans to increase its investment in China by 40 percent in 2011, primarily by opening 175-200 new restaurants in the country, the company said in a statement on Wednesday. (© Petar Kujundzic / Reuters/Petar Kujundzic/Reuters)

Strategy

How to play China's slowdown Add to ...

It’s one of the few places where slowing growth could be a good thing.

Chinese officials cut the country’s 2012 target growth rate on Monday to 7.5 per cent, the lowest in eight years. The country’s premier called “expanding consumer demand” one of his priorities for the upcoming year. The move comes after a decade in which building vast infrastructure projects and boosting the country’s exports took centre stage in the Chinese economy.

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A slowdown in the world’s second-largest economy may put the global stock market’s current rally on hold for now. But building the consumer base in China should benefit things ranging from mobile phone carriers to frontier markets.





“What we’re looking for is slower growth but higher profitability. That’s the next big transition in China,” said Edmund Harris, a portfolio manager at Guinness Atkinson Asset Management who runs the $180-million (U.S.) Guinness Atkinson China and Hong Kong Fund. The fund has returned an annualized 13.1 per cent over the last 10 years.

China’s new focus on the consumer is necessary for its industrialization efforts and economy to become self-sustaining, Mr. Harris said. Consumer spending makes up about 35 per cent of the country’s gross domestic product, down from about 50 per cent in 1990. By comparison, consumer spending accounts for about 70 per cent of the U.S. economy.

Mr. Harris is investing in companies that will target the masses. Dongfeng Motor Group Co Ltd., which makes up 3.5 per cent of his stock fund’s assets, builds smaller cars that are affordable for consumers purchasing a car for the first time.

China Mobile Ltd. , the country’s largest mobile phone operator, is one of Mr. Harris’s largest holdings at about 4 per cent of assets.

“This is a Chinese company that is a pretty good proxy for a population that is getting wealthier,” he said, noting China Mobile is using mobile phones for voice, Web and data services. The company also offers a 3.9 per cent yield.

Global companies that make basic consumer products could also benefit. “Chinese consumers will continue buying products from big brand name multinational companies because they have a reputation for quality,” said Paul Dietrich, director of global research at Washington Wealth Management. He thinks that companies like Coca-Cola Co. , McDonald’s Corp. and Yum Brands Inc. will continue to expand in the country.

He’s especially bullish on global auto companies such as General Motors Co. , which are increasing market share in China.

The $950-million Vanguard Consumer Staples ETF is one option for investors who want to take a broader bet on the consumer sector. Procter & Gamble Co., Coca-Cola and Philip Morris International Inc. make up nearly a third of the fund’s assets. The fund yields 2.3 per cent.

China’s new emphasis on its consumers may slow down the global commodity market. That’s because demand is expected to drop for items like cement, steel and natural resources. “This is going to take some steam out of the 10-year bull market in commodities and directly impact those economies that are the most commodity-driven,” said Jim Kee, chief economist at South Texas Money Management.

Instead of directly shorting the oil or steel market, Mr. Kee said that investors should consider reducing their exposures to Canada and Australia, which are major commodity producers. Canada’s S&P/TSX composite index, for instance, is slanted toward resource producers like Potash Corp of Saskatchewan Inc. and and Teck Resources Ltd.

But oil may be one commodity that continues to gain. Mr. Dietrich is betting that the growth of China’s domestic auto market will continue to push gasoline prices higher worldwide.

“Gas usage is going to hold steady in the U.S. for the next 20 years because our demographics are modestly increasing. But if you look at Asia and parts of Latin America, it’s just going to go up at a very steep incline,” he said.

At 10 times earnings, Exxon Mobil Corp is one inexpensive way to make a long-term bet on the oil market. But investors who want to make a short-term bet should consider an exchange-traded fund like the PowerShares DB Oil fund, which tracks spot prices. The fund costs 75 cents per $100 invested.

MANUFACTURING SPILLOVER

So-called frontier markets also could benefit from China’s new emphasis on its consumers, but investors should prepare for volatility.

“We’re already seeing talk about low-skill, high-production operations moving to Vietnam and Bangladesh,” said Jerry Webman, chief economist at Oppenheimer Funds.

Vietnam’s main index rose about 20 percent this year after falling 27 percent last year. The Market Vectors Vietnam ETF offers one option to play the market. The fund, which costs 76 cents per $100 invested, is up 31.7 percent so far this year. It fell 44 percent last year.

 
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