According to The Economist, “The World Bank’s latest China Quarterly Update suggests that net exports contributed only 0.4 percentage points to GDP growth in the year in the fourth quarter of 2007. Overall GDP growth slowed only modestly (to 11.2%) because of faster growth in domestic demand, which contributed an impressive 10.8 percentage points.”

These recent numbers suggest that the Chinese economy appears to be transitioning into a sustainable form of adolescence. Achieving a more proper balance between domestic production and consumption should enable Beijing to gradually allow more currency appreciation as a means of fighting inflation.

What that will mean for the American consumer remains to be seen. Political threats of more American protectionism combined with a rising yuan won’t do much to alleviate John. Q Public’s pain. If anything, he’ll have to spend more of something he already doesn’t have.

On the other hand, companies with assets denominated in Chinese yuan should see a boost. Companies earning profits from people with money to burn (the Chinese) shouldn’t do too badly, either.

And I’ve found a company that satisfies both conditions.

This company owns the franchise to manufacture, market and distribute the products of the Coca-Cola Co. And we’re not just talking 7-Elevens on Hong Kong Island. This company also distributes Coca-Cola products in Taiwan, as well as in 11 states in the U.S. and seven provinces in mainland China. This represents a total franchise population of over 420 million people, or, if you prefer, 6.4% of the world’s population.

And that’s just the tip of the iceberg.

At Free Market Investor, we’ve warned investors to be very cautious on stocks reliant on American consumers. We stressed shifting focus from companies that produce luxury items (such as Apple, Starbucks or P.F. Chang’s China Bistro) to companies that provide staples (such as Altria Group, Budweiser, Coca-Cola, Exxon or Johnson & Johnson).

Even if John Q. Public lost his house and credit card, he’d use that last $20 to buy what he needs. The list would read something like this: toilet paper, Diet Coke and a pack of smokes.

Every month brings us closer to this reality. In February, over 223,650 American homeowners filed for foreclosure. On top of that, unemployment insurance applications increased nearly 20-fold. Investingwise, that puts us back to the basics. Forget the MacBook Air and start thinking consumer staples.

For investors, companies that own or produce revenue streams from tangible assets (rental income), consumer staples (Coca-Cola) or natural resources (oil and natural gas) should prosper. Finding a single company – a conglomerate – capable of producing cash flow from all three seems even better.

That’s the beauty of many conglomerates. Conglomerates often operate within a diversified group of income-producing industries. Meaning revenues aren’t tied to any one particular division. Diversified income streams typically strengthen a company’s margin of safety.

Regards,

Christopher Hancock
for The Daily Reckoning

Source: The True Chinese Economy

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