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Charging China

Neil George
Neil George
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With so many company executives and their pals on Capitol Hill charging that China is the new bogeyman, you'd think our economy and nation are under attack. But the reality is we're far from anything even close to that scenario.

The bid by CNOOC (Chinese National Overseas Oil Company) to acquire US-headquartered Unocal has set off yet another round of complaints over China threatening the US, if not the world.

Yes, China's place in the world economy and in the US market specifically is getting more significant, but it's very much a two-way street that's expanding.

Just in the last couple of years, foreign direct investment flows into the US have been surging. And it's gaining steam. In the last year alone, companies from around the world and beyond just China sent around $107 billion to our shores to build up or acquire business and economic assets in our markets.

This was up more than 59 percent from the $67 billion invested in the US in the prior year. And with this year barely half over, look for this trend to continue.

While the world was investing in the US, US companies continued to send our capital in ever greater amounts beyond the borders to invest heavily abroad. US companies sent more than $250 billion abroad, up more than 77 percent from the prior year's $140 billion.

Even if you simply look at the biggest cash deals to buy US companies, the proposed $20 billion Unocal/CNOOC deal would only rank third. The biggest was the recent deal by SBC and BellSouth's wireless co-op Cingular to grab AT&T assets, followed by Dutch consumer goods giant Unilever's purchase of US-based Best Foods for $24 billion. Didn't hear much screaming about that one, did you?

The truth is, while we might not like that some of the biggest companies operating in the US don't bleed red, white and blue, it really shouldn't matter. The markets aren't about where companies are headquartered; they're about how well companies succeed at building profits and adding to local economies.

Take one of the biggest US firms, General Electric. The company just announced that it expects some of its most significant sales gains to come from well beyond our shores. Some $120 billion is seen to be coming GE's way during the next five years. And China is contributing the largest single source of that gain.

You can go down the list of GE's US corporate peers. They all depend upon their investments around the world, especially in China, for an increasing chunk of their business success.

Two Way Street

China is one of the champs of domestic economic growth. It continues to build an impressive record of growth that exceeds most of the world's other major economies. Companies and investors--including all of us–continue to capitalize on this growth process.

But it's not just about China exporting everything at cut-rate or cut-throat prices. China also continues to import increasingly massive amounts of goods, from capital to consumer goods as well as raw materials and energy.

Little of this is being discussed in the sound bites from the financial punditry and the political circles. They see advantage in charging China with not playing fairly.

But there are some cooler heads including Federal Reserve boss Alan Greenspan and Treasury Secretary John Snow. They've come out in just the last month stating that any new punitive or protectionist tariffs would only serve to bring woe to many US companies and consumers and would only transfer some of our import sources to other competitive markets that exist beyond China.

We can cave to the rhetoric or we can cash in on the whole process of China's continued expansion. This is exactly what IBM is doing in its recently completed deal to sell its PC business to China-based Growth Portfolio member Lenovo of China.

Big Blue recognized that it needed to better focus on its true competitive advantages including servers and business services. It also wanted better access to China's computer market.

The Lenovo deal does both. It enables IBM to offer PC products produced by Lenovo while getting Lenovo's help in expanding its sales of other products and services in China. Lenovo is the star of the local market and why we keep buying it up to 7.

Cashing In On China

Investing in China isn't just about buying local deals like Lenovo. It's about buying into companies and markets that are cashing in on the long-haul expansion in this stirring economic titan.

And if you go through the list of our other holdings in the Growth Portfolio on pp. 6-7, you'll see that a big chunk of what we all should own are well-invested and already cashing in on China.

It starts right at the top of the list with Archer Daniels Midland (ADM). The company keeps selling tons of raw and processed ag products in China. And by working with that nation's regulators, it continues to expand China's demand for ADM's genetically modified organism (GMO) products, from beans to grains. ADM is a buy up to 25.

ADM is profiting right along with its partner in the GMO markets; Monsanto continues to develop seed and other related products that are addressing the local needs of Chinese growers and processors, including its newer engineered rice products. This is yet one in a litany of advantages that warrants buying Monsanto up to 75.

Others on our list are also continuing to get it right for the long haul in selling more stuff in China. News Corp, now based right here in the US, isn't just a one of the largest media companies in Asia. It's managed, through years of work with the Chinese government, to become one of the biggest non-Asian companies in broadcast media in China.

The company saw China's demand in the making decades ago and made its investment early. Now with news and entertainment being generated around that nation, the breadth and recognition of the Chinese divisions alone are reason to continue to buy News Corp up to 29.

And selling more stuff to China isn't just limited to US-based companies. China's neighbor Korea has been a major source of profits for us during the last several years and that will only increase in the years to come. It's led by Samsung Electronics, which continues to successfully sell countless components and finished goods to an eager consumer economy in China.

With China being a source of low-priced skilled labor, Samsung is also able to source some of its goods both for Chinese and global consumers right in the mainland. Samsung is a prime play on China and a buy up to 530.

And Samsung is just the beginning. From Posco's iron and steel mills, to cars and ships from the likes of the Hyundai companies, Korea is an eager partner in China's success. This is why we're still enthusiastic about all of the companies embedded in the Korea Fund, which is a buy and hold up to 30.

Europe is also front and center when investing, buying and selling in China. And one of our leading champs is Siemens, Germany's answer to GE. From China's newer power generation plants to its latest and greatest transportation systems, to its postal system's architecture and equipment, the strong historical ties between Siemens and its founding family and China is furthering the company's huge and building success that's been underway for decades. Siemens is a great buy up to 94.

Moving all of the goods in and out of China couldn't happen without stalwart Growth Portfolio member Hutchinson Whampoa. Forget about the company's strategic properties, ports, retail and distribution centers, energy assets and communications. If we simply take the port facilities the company owns in and around China, Hutchison becomes a must buy up to 55.

Last, here's an option on China if you're not convinced about our direct buys or want even more direct exposure to the local and regional players cashing in on China. There's one sole mutual fund company that's proved itself and earned our trust--Matthews. We continue to buy and hold both Matthews Asia Growth and Income as well as its twin sister fund, Asian Tiger.

Neil George will be available to take your questions until Monday, July 11. Please use the form below to submit your questions.

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