Sasha Cekerevac: For many years, people from all over the world have been envious of the economic growth in the Chinese economy. Since leaders of that nation have transformed the Chinese economy from purely state-controlled to more capitalistic, China’s growth has been astounding.
Looking back, it is easy today to think of the Chinese economy in terms of the allocation of funds for long-term investing—hindsight is always 20/20. However, the trick is to look forward over the next decade and determine the most likely scenario for long-term investing possibilities.
A common complaint by outsiders regarding the Chinese economy has been the use of cheap wages to increase its competitiveness. It is true that the Chinese economy has benefited greatly from much lower wages than many other nations around the world. Additionally, the size of the working population is huge.
However, it appears that the demographics and costs are now beginning to shift against the Chinese economy, and those interested in long-term investing might be able to create a portfolio that will benefit from this change.
The Asian Development Bank (ADB) recently noted that wages adjusted for inflation have more than tripled over the past decade in the Chinese economy. Additionally, new labor laws have increased costs for businesses to hire and fire people. (Source: “China surging wages threaten economy’s competitiveness, ADB says,” Bloomberg, April 9, 2013.)
Additionally, ADB reports that wages are being pushed higher, as the pool of working-age people shrinks. Because the one child policy has been in place for so many years, China is entering a troubling demographic scenario, as there will be far less people available to work in the future.
According to Bloomberg, currently in the Chinese economy, there are 525 million people who are 15–39 years old and available for work; that’s a decline from the 557 million just five years ago. (Source: Ibid.)
Over the next decade, which is an appropriate timeline for long-term investing, we will most likely continue to see substantial wage increases in the Chinese economy and a decrease in the number of available workers. This will push producers into other nations that could benefit from this changing demographic scenario.
So when considering long-term investing that will benefit from this massive shift in the Chinese economy, look at which nations are able to accommodate producers and are close enough to the larger markets.
The U.S. is still the largest economy, with the Chinese economy growing rapidly. Mexico has become an extremely important component for the U.S. economy. Because of the increase in wages within the Chinese economy over the past decade, the gap between China’s workers and Mexican workers has declined. Plus, the increase in speed of transport between Mexico and the U.S., along with lower transportation costs, should continue to benefit Mexico over the long term.
Within Asia, I would diversify my portfolio when it comes to long-term investing by looking at various emerging market nations, such as Malaysia (NYSEARCA:EWM), Indonesia (NYSEARCA:IDX), and Thailand (NYSEARCA:THD). All of these countries have exchange-traded funds (ETFs) that allow someone interested in long-term investing to accumulate exposure at a relatively low cost.
Additionally, I would diversify my long-term investing portfolio by adding an upmarket investment like Singapore. The Chinese economy will continue to grow, and this will produce significant amounts of wealth. Much like other nations, the wealthy like to diversify their investments, and Singapore is a growing hub of international business and offshore banking. Think of Singapore as the Asian version of Switzerland. In fact, many clients of Swiss banks are now moving funds into Singapore and other locales, as Switzerland is facing increasing pressure to lower secrecy regarding tax avoidance and evasion schemes.
The Chinese economy will suffer growing pains, as do all nations. However, when it comes to long-term investing, there will be plenty of opportunities to build a well-diversified portfolio that will benefit from the continued growth of the Chinese economy for many decades.
Related: iShares MSCI Malaysia Index Fund (ETF) (NYSEARCA:EWM), Market Vectors Indonesia Index (ETF) (NYSEARCA:IDX), iShares MSCI Thailand Index Fund (NYSEARCA:THD).