Why China can't slow down

By Jim Jubak

China's national economic plans have been reduced to a shambles. Which is great news for investors in energy, materials and capital equipment.

At least for a while. I'd say we have 12 to 18 months of relatively clear sailing before the bills come due, as they always do.

My advice: Rejoice for a moment and then add to share positions in companies likely to benefit from the shambles. In this column, I'll give you 10 stocks that fit that profile.

And watch like a hawk in 2008 for signs either that the Chinese economy is reaching a boiling point or that the Chinese government is ready to get serious about turning down the flame under the pot.

Grow slow is a no-go

China's government wanted to slow the economy's growth a bit from the 10.7% rate turned in for 2006. A rate near 8% would be ideal, Beijing's planners said at the beginning of 2007, because that is high enough to generate the jobs the country needs to stay even with its population growth and low enough to keep the economy from further overheating. Instead, what they got was 11.1% growth in the first quarter, the National Bureau of Statistics announced April 19. And now the Chinese Academy of Social Sciences is predicting 10.9% growth for all of 2007.

So you can put away your worries about the global economy until 2008, I'd say. China's economy -- no matter what the planners in Beijing might want -- just won't let the global economy slow down.

And the problem -- for Beijing's economic planners anyway -- gets even worse when you dig down into the first-quarter numbers. The Beijing government not only wanted to slow the rate of economic growth from 2006's 10.7%, it wanted to shift the source of that growth away from the export-oriented industrial sector and toward the domestically oriented service sector.

That effort, so far, is failing dismally. Growth in factory output climbed 18.3% in the first quarter of 2007, even faster than growth in the economy as a whole. Those industries -- petrochemicals, coke-making, fuel processing and refining, and metal production and processing -- that consume the most energy grew at a 21% annual rate. And it looks like the steady decline in the service sector's share of the national economy -- to 39.5% in 2006 from 40.7% in 2004 -- will continue in 2007.

Commodities demand won't ease

So instead of seeing a slowing in production from export industries that consume a lot of imported oil, iron ore, copper and other raw materials, production from those industries actually went up in the first quarter and looks likely to grow at the same rate or slightly higher for all of 2007.

And companies -- along with overseas investors -- are putting more money into the kind of hard industrial and infrastructure investments that soak up even more of the global supply of these commodities. Urban fixed-asset investments -- things like roads, apartments and factories -- climbed 25% in the first quarter of 2007 from the first quarter of 2006. Investment in some commodity-consuming sectors is growing even faster: Investment in the cement and aluminum sectors climbed by 39.4% and 49.3%, respectively, in the first quarter of 2007 from the same quarter in 2006.

Forget about worries that falling demand in China for copper, nickel, iron ore, zinc, tin, coal and oil will put an end to the current global boom in commodities prices anytime soon. Inventories are tight and growing tighter. Demand from China will keep the upward pressure on prices well into 2008, especially because in many of these commodity industries' planned additions to production capacity won't really add much to supply until 2008 or later.

10 stocks to ride

If you follow the recommendations in Jubak's Picks, you've already got decent exposure to sectors that will benefit from higher-than-expected growth in China. I'd think about adding to positions in these five picks:

• A.O. Smith (AOS, news, msgs) has a water-heater business in China that grew by 36% in the first quarter of 2007. The stock is one way to play China's real estate and home construction boom.
• Anglo American (AAUK, news, msgs) has become a play on China's continued demand for coal. The company is expanding a joint venture to build a clean-coal-to-chemicals project and invested in the 2006 IPO of China's largest coal producer.
• BHP Billiton (BHP, news, msgs) produces just about every commodity, from metallurgical coal to copper, that China needs from nearby Australia.
• Companhia Vale do Rio Doce (RIO, news, msgs) has 23% of the Chinese iron ore market.
• Komatsu (KMTUY, news, msgs), the second largest maker of construction equipment in the world, has aggressively targeted sales to China.

And, if you'd like to add to that exposure, here are five more stocks to consider:

• Joy Global (JOYG, news, msgs), one of the three big suppliers of mining equipment to survive the 25-year industry slump, is reaping the rewards now that the mining industry is booming.
• Peabody Energy (BTU, news, msgs), the biggest U.S. coal producer, has been busy acquiring coal assets in Australia to get a leg up on the Chinese market.
• Terex (TEX, news, msgs), a smaller player in the mining and construction segments, will also give your portfolio exposure to new factory construction through its division that sells such things as aerial work platforms. Through acquisitions and joint ventures, Terex has entered the Chinese market for surface-mining trucks and construction cranes.
• Wabtec (WAB, news, msgs) is a maker of railroad equipment -- from brakes to electronic control systems to locomotives -- that sells to exporters such as General Electric (GE, news, msgs) that are supplying the railroad build-out in China and India. About 40% to 50% of the company's sales come from such original equipment makers.
• Zinifex (ZFEXF, news, msgs), an Australian zinc miner and smelter, has acquired two new high-yield zinc ore deposits in Canada and is looking at a global zinc market with a projected supply deficit of 140,000 metric tons in 2007.

Continued: This growth rate can't keep up

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