Get set to invest in the new China

Related topics: China, Coach, Yingli Green Energy, Baidu, Jim Jubak

Meet the new and improved China. The government released the draft of its next five-year plan -- its 12th -- on March 5. The plan includes soaring goals written by numbers-obsessed bureaucrats (3.3 patents for every 10,000 people, for example). It also commands the uncommandable, such as improved democracy.

This latest plan lays out a major shift in the Chinese economy. It calls for slower growth, increased domestic consumption, cuts in water and energy consumption per unit of GDP, a shift toward a service economy, an increase in urbanization and a 13% annual increase in the minimum wage. Here are some of its major themes:

• Slower economic growth. The plan calls for reducing annual gross domestic product growth to 8% this year and to an average of 7% a year over the five-year period. That's a big change from the 10.3% growth in 2010.
• Faster income growth. The goal is to increase household incomes by 7% a year on average over the period of the plan. One way to do that is through a 13% average annual increase in the minimum wage. Another way is to create millions more jobs in cities. China has set a goal of increasing its urbanization rate 4 percentage points, to 51.5%, over the five years.
• More housing. The plan calls for the construction or renovation of 36 million apartments for low-income families.
• Larger service sector. It also seeks a shift in the economy toward domestic consumption and the service sector from exports and manufacturing. Under the plan, the service sector is to grow to 47% of GDP. That would be an increase of 4 percentage points.
• Better retirement benefits. Under the plan, pensions would be created to cover all rural residents and 357 million urban residents.
• More efficient use of energy and water. Energy consumption per unit of GDP would be cut by 16% and water consumption per unit of industrial output would be cut by 30%. In addition, nonfossil fuels are to account for 11.4% of primary energy consumption.
• General price stability. Inflation is now running at about a 5% annual rate.

Clearly, if you're invested in China or interested in investing in China, you should tweak your investment strategy. But how, exactly? The final versions of previous five-year plans haven't deviated much from the draft released at the start of the meeting of the National People's Congress. So the outlines of this draft plan are likely to be very close to the final plan itself.

As I wrote in a March 7 post on my site, I don't think there's any reason to doubt that China's leaders take these goals seriously and intend to reach them. But I do doubt that they can actually deliver on all of them. This isn't Chairman Mao's command economy anymore. It's important that investors incorporate some assessment of "commandability" in their investment strategy to take account of what will actually get accomplished and what is just words on paper.

Further, I wouldn't make too much of the February trade deficit China reported on March 10. The timing of the Lunar New Year distorts year-to-year comparisons as it shifts between January and February. (The holiday tends to disrupt shipments; companies compensate by ordering and delivering earlier.) The $7.3 billion trade deficit for February, the biggest in seven years, is just about balanced by the $6.5 billion surplus in January.

Using the new five-year plan as a guide, here's my list of what is likely to happen, either because the government in Beijing can make it happen or because the goal is aligned with the self-interests of a significant number of powerful companies and individuals. I also offer some suggestions of which companies -- in and outside of China -- will benefit, as well as stocks to buy to take advantage of the coming changes:

1. The government is going to build a lot of housing. It probably won't build all 36 million units that are in the plan, and many of the units that do get built won't be for the intended low-income market, but it's in the self-interest of China's heavy construction industry to see lots of building. It's also in the self-interest of local governments to see land move from farmers to developers. All that construction, plus the usual heavy infrastructure investment, will keep China's demand for raw materials growing. Steel and copper consumption will continue to increase. Jiangxi Copper projects copper demand growth in China of 7% in 2011.
   
   Stock pick: I recommend Jiangxi Copper (JIXAY, news) (it trades over the counter in the U.S. and as 358.HK in Hong Kong).
   
2. The emphasis on energy efficiency and nonfossil fuels will mean continued growth for solar and wind energy companies. You've probably already figured that out. But it should also lead to increased growth in China's demand for uranium. By 2030, according to China's National Energy Administration, China could be the world's largest importer of uranium. China is also likely to become one of the world's biggest importers of liquefied natural gas. Last year, China's liquefied natural gas imports rose by 69%.
   
   Stock picks: My plays for this theme are solar-cell maker Yingli Green Energy (YGE, news), a member of my Jubak's Picks portfolio, and Australian uranium and natural gas play BHP Billiton (BHP, news), a member of my Jubak Picks 50 long-term portfolio.
   
3. I think we should be skeptical of Beijing's ability to shift the economy significantly away from exports and manufacturing and toward domestic consumption and services. There are an awful lot of entrenched interests making good money out of the current division of GDP. But the government can achieve part of its goals by raising the minimum wage, which will increase the number of Chinese consumers with more disposable income.
   
   First, I'd look toward non-Chinese companies that have figured out at least the basics of selling in the Chinese market and that own brands with cachet for Chinese consumers. Best Buy (BBY, news), which has closed its China stores, and Mattel (MAT, news), which has closed its flagship Barbie store in Shanghai, are reminders that getting it right isn't simple. Chinese consumers remain extremely price-sensitive and brand-conscious. Best Buy's idea of selling extra services just didn't resonate with these consumers. Mattel misunderstood the current Chinese preference for cute over sexy.
   
   Second, I would add a dose of homegrown Chinese companies that get this whole consumer/service thing.
   
   

   

   Stock picks: For non-Chinese companies, I recommend Sanrio (unfortunately the owner of Hello Kitty trades in significant volume only in Tokyo, as 8136.JP), leather goods retailer Coach (COH, news), LVMH Moët Hennessy Louis Vuitton (LVMUY, news) (volume for the luxury-goods maker is decent in New York as LVMUY, but much better in Paris, where it trades as MC.JP), and eyewear maker and retailer Luxottica (LUX, news). (For a closer look at this company, see my March 4 post "Crystal-clear praise for Luxottica.") Coach is a member of my Jubak's Picks portfolio. (Find recent updates here.)
   
   Among Chinese companies, I recommend hotel operator Home Inns & Hotels Management (HMIN, news), department store owner and operator (3368.HK for volume; the U.S. shares don't seem to trade much) and Internet company Baidu (BIDU, news). (Baidu is a member of my Jubak's Picks portfolio and Home Inns is on my watch list.

And speaking of watch lists, I wouldn't rush out to load up on China just yet. For the first half of 2011, I think U.S. stocks will outperform just about all other markets. It will be time to start rotating out of U.S. stocks and into emerging market equities in May or so. For more on timing that transition, see my March 7 column "Prepare for a stock market curveball."

At the time of publication, Jim Jubak did not 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 own positions in any stock mentioned in this post. The fund did own shares of Baidu, Coach, Home Inns & Hotels Management, LVMH, Sanrio and Yingli Green Energy as of the end of January. Find a full list of the stocks in the fund as of the end of January 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 MoneyShow.com. Get a free 60-day trial subscription to JAM, his premium investment letter, by using this code: MSN60 when you register here.

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