Mining stocks best way to latch onto Chinese boom

CHINA is by a large margin the fastest-growing major international economy. Its economic success has translated into a decent stock market performance in its own exchanges but finding a “play” on that can be problematic. Irish investors are naturally reluctant to invest their money in the Shenzen or Shanghai stock exchanges, as these territories are wholly unfamiliar.

Perhaps the best way of gaining exposure to the Chinese growth story is via companies who have trading links with China. The most obvious examples are within the Basic Materials sector, in stocks such as Rio Tinto. Commodity prices have risen dramatically in response to a huge rise in infra-structural investment across China and companies like Rio Tinto benefit from this. But before going any further it is worthwhile analysing the background to China’s growth. Economists are forecasting GDP growth in the region of 8.5% this year and 9.5% next year. This sort of growth is what one might expect from a small open economy, such as Ireland, not from a country whose population comfortably exceeds one billion. By comparison, Germany would do well to grow at even 2% in 2003.

China’s growth is all the more surprising given the hurdles that its economy has faced recently. In much the same way that foot and mouth brought Ireland to a standstill three years ago, SARS had a dramatic effect on travel numbers into China. Nearly two-thirds of all SARS cases were recorded in China with the result that the WHO issued an advisory against travel into Hong Kong, Guangzhou and other key economic zones.

Thankfully, SARS now seems to be fully under control, partly due comprehensive prevention measures introduced by the Beijing-based government, and the stream of Foreign Direct Investment into China has resumed after a brief collapse.

Foreign Direct Investment has been a major part of China’s growth story. The other key component has been political reform. The open-door policy was introduced by premier Deng Xiopeng in the early 1990s. This far-reaching initiative was aimed at attracting foreign investors to China.

Special economic zones were created around key areas, usually ports such as Shanghai, Tianjin, Beijing and Guangzhou. Investors in these areas are conferred with tax breaks and major subsidies (often including fully kitted out manufacturing facilities). Moreover, the Chinese government has equipped these areas with state-of-the-art infrastructure.

Multinationals responded in kind and Foreign Direct Investment rose from virtually zero in 1990 to an estimated $55bn in 2003. The country is currently building the Three Gorges Dam, However, China does not possess all of the key materials needed for projects like this, such as copper or tungsten.

The major beneficiaries of this are mining stocks like Rio Tinto and Xstrata, both FTSE100 members. A stock such as Rio Tinto has exposure to several different commodity prices and therefore benefits from the general rise in prices.

For info on Rio Tinto contact Goodbody Private Client Stockbrokers at [phone], [phone].