Right now, just about every piece of news you read on China is bad: the economic slowdown, the stock market jitters, and the currency devaluations. But this morning I want you to concentrate on the economic reality in China instead of relying on day-to-day volatile stock market data.
Remember, China has the largest population on Earth. It’s also the largest economy (by purchasing power parity) and it is Australia’s biggest trade partner. The best opportunities for Australia over the next decade and beyond will be from China.
Over the last 30 years China built the foundation for their economy. It was all about basic industries and basic services. It is now switching towards more value-added industries and more value-added services. It is shifting its growth from the investment side to the consumption side.
The investment side simply means factory-building. The consumption side means more wealthy consumers buying goods and services. To accomplish that, China needs to upgrade its consumers.
China has been growing at break-neck speed in the past three decades, which led to high income growth. This growing wealth feeds directly into the consumers’ pockets and they can now spend more on consumer products and services.
You’ve probably heard this called ‘the rising middle class of China’.
On the other side of the equation, China has been keeping inflation in check to protect the spending power of its citizens. The yuan has appreciated over the years, making imported goods cheaper for Chinese consumers. And let’s not forget health care and social security. China has done a lot on that front too. That also supports more consumer spending power.
So now we have an ‘upgraded consumer’ with more pocket money. To demonstrate this, consider why China has become the most important growth market for Apple. Also consider the fact that the Chinese banking sector is larger than the US banking sector in terms of asset size.
The smallest of the BIG Four Chinese banks, Bank of China, is already bigger than the biggest commercial bank in the US, JP Morgan Chase. Simply put, all that money has to be spent! And Chinese consumers want Australian agriculture products.
Australia has the stuff people want
If the ‘Old Australia’ was all about mining, then it is already dead… But the ‘New Australia’ will continue to capitalise on the world’s largest population for another dramatic boom.
This ‘New Australia’ will again rise from the commodities sector. But this time it will not be hard commodities; it will be soft — Australian agricultural products.
But we are here to ask one important question. Why do Chinese consumers want to buy Australian agricultural products? To answer this question, we need to pay attention to the socioeconomic dynamics of China.
There are two dominant issues for Chinese agricultural products at this point. One is that China is a country with food scarcity; therefore it is a net food importer. Secondly, China’s own sources of supply often have quality issues which put consumers’ health at risk. This has prompted increased demand for safer overseas food products.
The number one issue is food security. That is what keeps Xi Jinping awake at night. It doesn’t matter how many factories China creates, it needs to be able to feed its own people. China has an apparent food supply constraint. As it urbanises, its arable land decreases. It also has water scarcity, particularly for farming.
So what does the State Council call for? Investments in farming, zero tax for agricultural businesses in China, subsidies and more. In addition, China needs to import more agricultural products. China became a top world food importer in 2013-2014.
Have a look at the charts below. They forecast the magnitude of imports originating from China. As you can see, it is going to be absolutely massive!
Apart from food scarcity and growing demand, another big reason for wanting to buy overseas food products is brand value, safety value and the superior product value of imported products, especially products from Australia and New Zealand.
China’s own food products have had countless scandals over the years. I am not going to dig into how unsafe the Chinese food products are today, but you can comfortably take my word for it.
The new middle class in China wants nothing less than Australian products. Simply put, that ‘quality seal’ from Australia is worth a lot of money!
I am by no means the only person who sees this opportunity. But I strongly believe this is one of Australia’s biggest opportunities in the next ten years. Below are two ‘key findings’ from The 2014 Australia-China Trade Report from the National Australian Bank:
‘The engine of growth is shifting from resources to other sectors and industries. Australian nonresources exports to China are growing in agriculture, manufacture and services. Twenty percent of Australian non-resources exports go into Chinese final consumer markets.
‘Chinese demand for premium and high quality Australian food products, such as beef and meats, has increased dramatically in the last two years.’
Some of the key agribiz sectors investors want to concentrate on include meat and dairy, wheat and flour, sugar mills, fruit and vegetables, wine, counter-seasonal horticulturalists and organic food.
In short, don’t let the current market crisis stop you from seeing the fundamental shifts in global demand and supply. You should continue to look at the most critical investment opportunity for Australia — the Sino-Australia trade/investment link.
This is one area I’ll be keeping a close eye on for subscribers of my investment advisory, New Frontier Investor. You can find out more about that here.
From the Port Phillip Publishing Library
Special Report: You probably already sense that stocks might be in for another bumpy ride in 2016. But that doesn’t have to mean that you have to miss out on making great money. Because, according to small-cap analyst Sam Volkering, certain stocks could rise hundreds of percent no matter what happens in the next 12 months. In this special report, Sam reveals the simple principle behind that success. And you’ll also discover his top three small-cap picks for 2016, which could bring you gains as high as 338% over the next 12 months. (more)