china

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    There go the base metals.



    The Daily Reckoning PRESENTS: Pao Mo! Pao Mo! Now that we
    know the real way to say 'bubble' in Chinese, here's a way
    for you to get in on it before it pops.


    THE NEXT EMPIRE
    By James Boxley Cooke

    Everyone in the West has long talked about China in terms
    of its massive potential. But the future is now.

    Many different elements - as you'll soon see - are
    combining forces. And China is beginning to realize its
    potential as a world economic superpower. Let's take a
    closer look at some promising developments in China over
    the past several years...

    We've seen diplomatic breakthroughs, such as the U.S.
    designation of China as a "most favored nation," and its
    entry into the World Trade Organization. And just as
    importantly, we've seen Hong Kong's growing free-market
    influence on the motley politics driving the mainland
    economy. We've seen small businesses springing up from the
    Chinese countryside like mushrooms. In fact, we've seen
    every indicator that the people of China, including its
    huge middle class, are ready for a full-scale economic
    revolution.

    China is not only the world's most populous nation, with
    over 1.3 billion citizens; it's also Asia's fastest-growing
    major economy. And has been for over a decade.

    Even with the current global economic slowdown, China is
    still likely to grow at more than 7% a year. That's a huge
    number for an economy this size. And it represents huge
    potential profits for us as investors.

    I think the potential for the newly capitalistic Chinese
    economy is absolutely enormous. And while there are
    certainly political risks to keep less intrepid souls at
    bay, even a small investment in this region has the
    potential to make a big impact on our portfolios in the
    months and years ahead.

    Take, for example, the thoughts of legendary hedge-fund
    manager [and friend of the Daily Reckoning] Jim Rogers, who
    enthused last year that no country's economic prospects
    excite him more than China's. In a Barron's interview,
    Rogers said, "The 21st century is the century of China...
    Everybody should teach their children and grandchildren
    Chinese.

    "There is no question China is going to dominate all of
    Asia," Rogers added. "... and the whole world, eventually."

    Strong words. But I think he's right. As I've said often,
    the development of China may well be the single-biggest
    investment story of the decade ahead. I suggest investing
    now, rather than trying to play catch-up later.

    One vehicle we recommend is the closed-end Templeton Dragon
    Fund, managed by Mark Mobius. It's traded on the New York
    Stock Exchange, and gives us broad diversification inside
    China with the best emerging-market manager in the
    business.

    As Oxford Club advisory panelist Lynn Carpenter writes,
    "One of the nice things about a closed-end fund is that -
    unlike a regular mutual fund - the assets under management
    don't fluctuate daily depending on contributions or
    withdrawals. Since the assets are stable, the manager of
    the fund can invest the assets for the long-term, without
    having to worry about redemptions."

    That's key. We want Mobius putting money to work when he
    sees opportunities, not when retail investors decide to
    send him cash. The same is true on the sell side. We don't
    want him pulling the trigger just to meet shareholder
    redemptions.

    Yet for all its potential, many investors still blanch when
    it comes to investing in this part of the world, noting
    that China is still a communist nation with a notoriously
    corrupt bureaucracy and only a gradually evolving rule of
    law. Are there enough positives to justify risking his
    capital in this part of the world?

    Yes, indeed.

    Sure, China is an area fraught with risks. It's no place
    for an investor for whom preservation of capital is
    paramount. But for more aggressive investors, it is a
    potential bonanza.

    Let me start with the basics. In 2001, China grew at more
    than seven times the rate of the U.S. economy, despite the
    fact that the country's population is more than five times
    as large. Yet the vast majority of U.S. investors remain
    oblivious to the investment implications, even though the
    economic story is front-page news.

    According to Andy Xie, a leading economist at Morgan
    Stanley in Hong Kong, "China's rise as a manufacturing base
    is going to have the same kind of impact on the world that
    the industrialization of the U.S. had, perhaps even
    bigger."

    In fact, China is already the world's fourth-largest
    industrial base, behind only the U.S., Germany and Japan.

    Already China makes:

    * More than 50% of the cameras sold world-wide
    * More than 35% of the televisions sold world-wide
    * More than 30% of the air conditioners sold world-wide
    * More than 25% of the washing machines sold world-wide
    * More than 22% of the refrigerators sold world-wide

    These numbers allow you to see the enormous impact that
    China is already having. But that impact is only just
    beginning. China's entry into the World Trade Organization
    is accelerating these economic trends at light speed.

    Why? World Trade Organization membership cuts production
    costs, forces down tariffs, and removes obstacles to
    selling overseas. That, in turn, is drawing record direct
    investment in China.

    Over $600 billion has been invested over the past two
    decades. And while individual investors and brokers are
    still asleep at the wheel, Fortune 500 companies are
    falling over themselves to take advantage of what's
    happening in the world's most populous country. For
    instance:

    * GM purchased more than $1 billion in spare parts from
    China in the last few years and plans to increase that
    figure dramatically in the near future.

    * Ford announced recently that it plans to boost its
    purchases of auto parts in China to as much as $1 billion
    annually starting this year (2003).

    * General Electric expects purchases from China - both
    parts and finished goods - to hit $5 billion annually in
    the next three years.

    * Wal-Mart concedes that more than $10 billion in Chinese-
    made goods are sold in its stores every year.

    * Motorola says its total investment in China will hit a
    record $50 billion this year.

    As you can see, the biggest investors in the U.S. - the
    Fortune 500 - are already plowing money into China.

    With the exception of Hong Kong, however, markets inside
    China are too wild, unregulated and risky for us to gamble
    our capital there directly. For these reasons, the best
    'safe' investment vehicle for our members remains the
    Templeton Dragon Fund.

    The fund is broadly diversified between Hong Kong, Taiwan
    and China and, as I mentioned before, managed by the
    world's leading emerging market manager, Mark Mobius. In my
    view, the Templeton Dragon Fund is the safest, most-liquid
    way to obtain a pure play on the growth of China.

    I remember our Club's Investment Director, Alexander Green,
    speaking at an investment conference at which he called
    China perhaps the single-biggest investment opportunity of
    the decade ahead. At once, a hand in the audience shot up.
    "Everyone comes back from China awestruck about the growth
    that's occurring there. But, in my opinion, China will
    never become a real investment opportunity until it quits
    relying on exports and starts developing its own domestic
    market."

    Tell that to General Motors, I say.

    For the year ended December 2002, GM reported that it sold
    over 264,000 vehicles in China, a 325% surge over 2001. And
    its goal is to have launched at least four new models in
    the world's fastest-growing auto market by the time this
    year is through.

    "Growth potential remains enormous in China," said Phil
    Murtaugh, chairman of GM China. "We will respond with an
    unprecedented series of product launches and continue to
    seek additional opportunities."

    (Incidentally, industry experts estimate that GM's profit
    margins are at least twice as high on cars it makes in
    China as on similar models made in the U.S.)

    For years investors have talked about the enormous
    potential of China's gargantuan market. But, in the end, it
    always seemed to boil down to potential and little else.

    There's a good reason for this. China has a well-deserved
    reputation as a fickle and ornery place for foreigners to
    do business. China's enigmatic legal system has only
    recently begun to honor property rights. Chinese
    entrepreneurs have often distinguished themselves primarily
    by aggressively pirating Western products like software,
    compact discs and cell phones. And foreigners have often
    tripped themselves up by overpaying for licenses,
    industrial land and office space.

    But things are changing, rapidly and for the better. Just a
    year after China joined the World Trade Organization, and
    two decades after it began allowing foreign companies to
    invest locally, multinationals are quickly capitalizing on
    China's fabled market.

    Chinese consumers - in droves - are now buying products
    from both domestic and foreign manufacturers. As the NY
    Times reported: "Already, the Chinese buy more cell phones
    than consumers anywhere else. They buy more film than the
    Japanese. They now buy as many vehicles as the Germans."

    * For companies like Siemens and Motorola, China has become
    the single-most important market for mobile phone handsets
    and other equipment, accounting for billions of dollars in
    annual revenue.

    * Japan's Toshiba now says it sells two-thirds of what it
    makes in its 34 China-based operations to the Chinese.
    Local sales were more than $2.5 billion last year.

    * McDonalds and Kentucky Fried Chicken have 700 China-based
    restaurants between them and open scores of additional
    stores each year.

    * Eastman Kodak controls an estimated 63% of the domestic
    market in China for rolled film.

    * Even Starbucks has found plenty of urban tea drinkers
    ready to spend $2.50 for a latte.

    Yes, foreign companies are doing very well in China. But,
    for most of them, it's still a small percentage of their
    total sales and profits. And the Chinese are too smart to
    let foreign companies rake in all the dough. There is
    tremendous opportunity for local Chinese companies as well.

    And American entrepreneurs are rapidly moving in. The Wall
    Street Journal confirms it. As Leslie Chang recently
    reported: "Last year China became the biggest recipient of
    foreign investment, for the first time surpassing the U.S.
    Foreign investment jumped almost 13% in 2002 to $52.74
    billion. Even SARS, of which more than 60% of all reported
    cases worldwide appeared in mainland China, so far appears
    not to have dented the country's essential appeal: cheap
    labor, improving technology, and a fast-growing consumer
    pool."

    In the future there will come a day when investors
    everywhere wake up and recognize China as "the opportunity
    of a lifetime." Dozens of mutual funds will spring up,
    offering myriad ways to capitalize on growth in China.
    Stockbrokers will call their clients and pitch their new
    China products with enthusiasm. "Business Week" and
    "Fortune" will run cover stories about the phenomenal
    growth in Chinese capital markets. Even your friends and
    colleagues will start telling you about the unprecedented
    investment opportunity they see in this nation of one and a
    quarter billion.

    And that, my friends, is when we'll be getting out.


    Sincerely,

    James Boxley Cooke,
    for The Daily Reckoning


    Editor's note: James Boxley Cooke is a former executive
    with T. Rowe Price, one of the oldest and most respected
    names in mutual fund management, with over $200 billion in
    assets under management. He is currently the Chairman of
    the Oxford Club.
 
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