How many good years left for investors?

So here's the crux of my ambiguity about China. Faster economic growth -- even if it's engineered by unsustainable bank lending and government spending -- will produce significant returns to holders of stocks linked to China's exporting and infrastructure sectors. I've mentioned some of those stocks before: Jiangxi Copper (JIXAY) and Aluminum Corporation of China (ACH) in China, for example, and Vale (VALE) and Freeport-McMoRan Copper & Gold (FCX) outside of China. I think you can see the beginnings of that trend over the past couple of weeks or so.

But at some point, the lending and spending that sustain this economic growth aren't sustainable. At some point, the Ponzi-like elements in China's wealth-management accounts do blow up. At some point, the flows of cash leaving the country do become a significant drag on growth.


I think the catalyst for when is demographic. A recent Organisation for Economic Co-operation and Development report, "Looking to 2060: Long-term Global Growth Prospects," projects that by 2045, China will have the same dependency ratio as the United Kingdom (39). The dependency ratio compares the number of people either too young or too old to work with the working-age population. A higher dependency ratio is bad, because it means fewer workers and more dependent youngsters and oldsters. In 2045, the OECD projects the dependency ratio in the United States will be a relatively lower 35.

History shows that, all else being equal, a higher dependency ratio goes along with a lower economic growth rate. On the basis of demographics, the OECD argues that India and Indonesia will be growing faster than China within the decade. And that China's growth rate will slow to 2.3% a year from 2030 to 2060. (The U.S. growth rate is projected to be 2% a year in that period.)

How does this relate to an answer to "when?" It certainly doesn't say that "when" won't arrive until 2030 or 2045 or 2060. If China's current risky economic policies are in large part a reaction to fears that growth might fall below 7% in 2012, think what pressure China's leaders will feel as they have to fight against demographic trends that are pushing the country toward 2.3% growth by 2030? The risk of a mistake with big consequences will certainly increase, as will trends, such as the flow of money out of China, that make the problem worse.

That doesn't suggest that "when" is 2013 or 2014 or even 2015. But it does suggest that China's growth rate and potential investment returns will likely become more volatile as the demographic clock ticks.

Even after the first bounce to "stimulus" stocks fades later this year or in early 2013, I'm still bullish enough on China to want to own the best of the country's domestic companies, such as Home Inns and Hotels Management (HMIN) or Tencent Holdings (TCEHY).

But the increasing volatility that I see as China's leaders struggle with a truly tough set of problems means I don't want to treat even those stocks as "buy and forget."

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Updates to Jubak's Picks

These recent blog posts contain updates to the stocks in Jubak's market-beating portfolios:

At the time publication, Jim Jubak did not own or control shares of any company mentioned in this column in his personal portfolio. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this column. The fund owned shares of Freeport-McMoRan Copper & Gold, Home Inns and Hotels Management, Jiangxi Copper and Tencent Holdings as of the end of September. Find a full list of the stocks in the fund as of the end of September here

Jim Jubak's column has run on MSN Money since 1997. He is the author of the book "The Jubak Picks," based on his market-beating Jubak's Picks portfolio; the writer of the Jubak's Picks blog; and the senior markets editor at Get a free 60-day trial subscription to JAM, his premium investment letter, by using this code: MSN60 when you register at the Jubak Asset Management website.

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