So you think the China boom is over? Think again.
The debate over whether China will have a hard or soft landing rolls on. I have argued before that I think China is nowhere near a hard landing. Just look at the GDP growth figures for the last five quarters: in Q1 2011 it was 9.7%, in Q2 it was 9.5%, Q3 was 9.1% and Q4 was 8.9%. Finally, in Q1 2012 it was 8.1%.
Now that looks about as soft a landing as you can get. We are seeing a gentle slowdown in the Chinese economy, which is being carefully orchestrated by the Chinese government.
I have heard people talk of China's slowdown as comparable to Japan's crash in 1989. There is no comparison: the Nikkei in 1989 was one of the most overvalued stock markets of all time. Its price-to-earnings (P/E) ratio was over 100. The current trailing P/E ratio of the Hang Seng is 9.8, which is even cheaper than the UK market.
I think the debate is moving on. The question now is, even if there is a soft landing, will China be able to sustain its growth in the years ahead? After all, Chinese salaries are rising fast, and the yuan is gradually appreciating. Soon China will lose its competitive advantage as a low-cost manufacturer. What does it do then?
Well, I think China will continue to do well, and will continue to be a good investment, because it has ambitious but achievable plans to transform its economy. Here, then, are the 3 phases of China's transformation.
Phase 1: the consumer boom
Rising salaries and an appreciating yen may make Chinese exports more expensive, but it also means that the purchasing power of Chinese consumers is climbing steadily higher.
There is now a rapidly expanding Chinese middle class with money to burn. And this middle class will just keep growing in size and in wealth.
And we are seeing already that this middle class has a taste for conspicuous consumption. Luxury-branded products from companies such as Burberry (LSE: BRBY) and Prada are flying off the shelves. China is now one of the world's biggest markets for luxury goods.
Recent data supports the notion that the consumer boom is already well underway. In the first quarter of 2012, Chinese retail sales grew an impressive 14.8% year-on-year. This is a consumer boom that will run and run.
Phase 2: research-intensive industry
Since 1999 China has been increasing spending on R&D by 20% a year, to reach over $100 billion today. In a year it is expected to overtake the US in terms of numbers of papers published. The Middle Kingdom produces some 1.5 million science and engineering graduates a year.
Why is China pouring so much of its resources into science? Quite simply, because it sees science as the future. Like Japan and South Korea before it, it plans to transform itself from a low-cost manufacturer to a leader in technologically-advanced, research-intensive industry.
New technologies such as 3D-printing and low-cost robots are appearing as the worlds of manufacturing and computing collide. Meanwhile, in healthcare the pharmaceutical industry will be transformed as genetics and biotechnology make the leap from the lab to the clinic.
Already blue-chip companies such as Microsoft (NASDAQ: MSFT.US), Unilever (LSE: ULVR) and GlaxoSmithKline (LSE: GSK) are basing research centres in China. In the future, more and more cutting-edge research will be done in China. The country could soon become a world leader in high technology.
Phase 3: financial services
I have noticed that this has got barely any mention in the media. But, in a nation where manufacturing has long dominated, I see a slow-burn boom in services, particularly financial services.
As the Chinese get wealthier they will open more bank accounts, they will buy more insurance, and they will start to invest more in the stock market. A boom in financial services transformed the UK's economy in the 80s and 90s. It could do the same for China, too.
The expansion of the service sector is seen as the last stage in the development of China's economy. But it may happen sooner than you think. In a recent report, PricewaterhouseCoopers estimated that China's domestic banking sector could overtake that of the US in 2023 -- that's only 11 years away.
The lucky country
Instead of taking just one route to success, China is pursuing every avenue it can, seizing every possible opportunity to grow its economy.
Not only is it promoting domestic consumption, but it is pumping investment into science and technology, and it is expanding its services sector as well. Plus, of course, it remains one of the world's leading manufacturers. This adds up to a formidable strategy for growth.
For all these reasons I see China as 'the lucky country', and one which I am drawn to investing in. Buy into China, and you might just be a lucky investor, too.
He avoided techs in the dotcom bubble and banks in the credit boom. But just where is dividend expert Neil Woodford investing today? All is revealed in this free Motley Fool report -- "8 Shares Held By Britain's Super Investor".
Further investment opportunities:
