Where to Invest in China, the Land of Opportunity, Over the Next Three Years

The title “land of opportunity” belongs to China. Economists expect it to officially become the second largest economy this year and to continue growing at record rates. Many of its industries however, are well developed and established. Which new rising industries should investors consider putting their money into over the three years?

Global Intelligence Alliance identifies six upcoming industries.

1. International travel

As many as 100 million Chinese mainland citizens are expected to travel overseas in 2010 and the travel bug will continue to draw millions more in the coming years. Chinese tourists are also the biggest shoppers, with one-third of their expenditure going to retail merchants overseas.

2. Luxury items

Chinese consumers now spend over US billion on luxury goods a year, buying up fine jewelry, expensive watches, luxury sedans and other luxury goods. It is the third-largest consumer of luxury goods, next only to Japan and the United States. As its economy continues along its current rate of growth, we can expect to see sales of luxury goods easily exceeding US billion in the next three to five years.

3. Environmentally friendly projects

China is big on energy consumption and big on its positive development. Investment in new energy sources is expected to reach US0 billion, with particular interest in wind energy, solar power and co-generation. The Chinese Government already provides subsidies to encourage the consumption of energy saving and environmental friendly products such as LED lighting and small vehicles. China is also encouraging independent innovation into new energy materials such as nano materials, eco-materials and structural materials.

4. Electric vehicles

The Chinese Government has set an ambitious target of having 5 percent of its passenger car sales being represented by electric vehicles by 2011. It is keen on the introduction of foreign high technology and research on Li-ion batteries.

5. Advanced life science and bio-breeding

Biotechnology is a buzzword in China and advanced diagnostic, measuring and testing equipments are hot items.

6. Information technology

There are areas in China where telecommunications networks have yet to be fully developed. While the Chinese Government will focus on developing local service providers, there is ample room for the development of 3G and wireless internet, integrated circuits, new display devices, IT infrastructure, software, etc.

Where in China to start looking

Overall, it is useful to look at the areas local governments have slated for further development by geography.

Eastern China

With an average GDP per capita of about US,000, Eastern China is the most developed and prosperous region. It can be explained by the fact that all three of its main economic zones, Bohai Rim (around Beijing), the Yangtze River delta and the Pearl River Delta, are located in this region. Together, they generate about 55 percent of the country’s gross domestic product (GDP). Eastern China takes up 10 percent of the country land mass and is home to 30 percent of its total population. The emerging industries here are automotive, electronics, petrochemicals and biotechnology.

Northeast China

Seen as an extension of the Bohai Rim, Northest China represents its heavy industrial centre. Average GDP per capita here is approximately half of that of Eastern China, at around US ,800. With the Government’s “Northeast Region Revitalization Policy” launched in 2003, China has a 10-15 year goal to develop the region into a manufacturing center. The emerging industries here include those involved in extracting and processing natural resources, the manufacture of new energy vehicles or biomedical products and software engineering.

Central China

Central China has been developing slower than other regions, and the Government issued a “Rise of Center China plan” in 2006 to foster greater development. Its average GDP per capita is slightly less than US,000. Wuhan is the most important city in Central China and acts as its economic and transportation center. The newly built high-speed railway has reduced the travelling time between Wuhan and Guangzhou from 12 hours to three hours. The emerging industries here are textiles and apparel, industrial machinery and renewable energy.

Western China

Comprising 70 percent of the country’s size and home to 27 percent of China’s total population, Western China is the least developed region of all, with an average GDP per capita of US,800. The good news is that it has been attracting a lot of private equity investment, particularly after the Government launched a “Go West” policy in 1999. Western China offers rich land resources and the local government has been offering preferential policies to attract foreign investments. The emerging industries here are infrastructure, chemicals and metals.

Warnings for new investors

There are fierce competitive pressures in China. Many Chinese companies are “policy-driven”. They often rush into markets that are encouraged by the Government, often creating oversupply. Chinese competitors, particularly those from the state-owned sectors, often have special relations with the Government and will enjoy a relatively low cost of capital. Thus, they can enter markets quickly and can expect to receive strong support from the Government.

Regarding information transparency, things are improving in China but there is still a long way to go. Published data continues to be typically unreliable and becomes obsolete very quickly.

China’s legal and regulatory system is also fast changing. It is often complex, opaque and inconsistently enforced. For instance, some central Government rules are not enforced or not enforced properly in the provinces. On the other hand, there are instances where rules may be suddenly enforced. Investors should be careful with promises from local officials, and it is essential to call upon well-informed legal advice before entering into an agreement.

Chinese culture values ‘guan xi’ (relationships) in business. Those with successful ventures have strong local presence and relationships, as well as domestic management who have been in China for long periods.

Foreign investors are well advised to work with advisors who are intimately familiar with local dynamics and challenges, and how to circumvent those in order to reap the rich rewards available in the market place.