China or Japan? My Investment Choice

 By: George Leong
So... will it be sushi or dim sum?

A friend said he was looking at investing in Japan and felt the country could return above-average returns along with moderate risk. He asked my opinion. Quickly, before he was able to finish his question, I said "China" without any hesitation. Buy Chinese stocks I said.

In my view, China is a far superior choice for capital than Japan.

China overtook Japan as the world's second largest economy and, in about 15 years, the Chinese economy is expected by pundits to become the world's largest economy. Clearly, in Asia, it has become a tale of two cities. While China continues to report near double-digit gross domestic product (GDP) growth in spite of some stalling, Japan is struggling along and unable to grow.

And while Japan has faltered over the past two decades, China has caught the world's imagination and used its massive cheap labor workforce to develop the world's largest manufacturing landscape opened for business for global manufacturers looking for cheap labor and lower cost to produce goods. Go and rent a movie called "Manufactured Landscapes," directed by Jennifer Baichwal, and you will be left astounded by China's manufacturing sector.

China is a dominant world economic power as well as a basin for incredible and sustained growth across many sectors, from industrial, to mining, to technology. If it is saleable and in demand, then you know that China has the consumer market for it.

China has a population of about 1.3 billion people; about five times the size of the United States. The size of the middle class is over 300 million and is expected to grow exponentially, as migrant workers have more disposable income. Presently, only a small fraction of China's GDP is driven by consumer spending compared to about 70% in the U.S. China wants to drive consumer spending long-term.

The World Bank estimates that, within five years, there will be 542 million middle-class consumers in China. I have heard estimates of up to 700 million!

Gartner Research estimates that China will represent 72% of the world's growth within the next 20 years. According to the Carnegie Endowment for Peace, China's economy will surpass the United States by 2035 and grow to be twice as large by 2050.

To grow, China will continue to spend money. With over $2.5 trillion in reserves, cash is not an issue.

I feel that the fiscal spending on infrastructure in China will continue to be increased by the government as the country grows. China will remain the top growth region going forward, while numerous other global economies are contracting, such as Europe and the U.S.

I firmly believe that China's need and desire to build up its infrastructure to modern standards and beyond will drive the demand for raw materials over the next decade and more.

Over the next five years, there will be a massive build-up of infrastructure as China comes in line with the rest of the industrialized world.

According to China's Transport Ministry, about $732.25 billion has been earmarked over the next three to five years for roads, waterways and ports. The country is also spending significant funds in the railroad sector. In addition, there is $710 billion for the country's rail system. China is building the largest high-speed rail system in the world.

The country's high-speed rail (defined as trains travelling with an average speed of over 120 mph) infrastructure is expanding rapidly. As of January 2011, the country's high-speed rail network is comprised of about 5,193 miles, according to chinatourmap.com. According to the plan, the country's high-speed network will expand to 8,123 miles by the end of 2011 and 16,000 miles by the end of 2015.

China will also spend $40.0 billion over the next two years on its new third-generation and fourth-generation mobile communications networks, according to the Ministry of Industry and Information Technology. In addition, China will spend on its electricity grid, as it brings power to over 1.3 billion people, along with the incredible industrial base.

So, do you invest in China or Japan? Isn't it obvious?

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