International investors have certainly paid attention to China in recent years. China's double-digit growth rates, rapid urbanization, and soaring trade surpluses have garnered plenty of media coverage and lead to increased interest in investing in China by ordinary investors.
China's manufacturing industry has traditionally been the focus of international pundits and investors but the service sector is quickly gaining ground as the next hot market. There are two key reasons to find the service sector an attractive investment.
Increased Consumption Will Follow Rising Incomes
It's no secret the Chinese economy has been experiencing an unprecedented boom that started in the 1980s. Chinese consumers have seen their wages triple, especially in the more developed coastal cities. As incomes rise these consumers are starting to spend more money on luxuries like travel and entertainment. This translates to tremendous opportunities to firms offering services to the new middle classes.
Stocks to Watch
Ctrip is the main online travel company serving China. Ctrip focuses on midrange business and frequent leisure travelers, a rapidly growing but largely undeserved market. Ctrip also benefits from strong brand recognition.
Home Inns & Hotels Management (NasdaqGS: HMIN)
Home Inns manages a chain of midlevel, economy hotels. While this might sound basic to a Western investor the concept is new in China, and a run-away success. Occupancy is around 95% and new properties continue to open at a brisk rate.
These service firms will benefit from wage increases and changes in Chinese lifestyles. As Chinese development spreads in land, the opportunities for these firms to expand will grow.
Currency Appreciation Will Aid Returns
Most analysts believe the Yuan, China's currency, is undervalued. Since the Yuan was uncoupled from the US dollar in 2005 it has appreciated 15%. This trend is likely to continue, in part because the Chinese government prevents the currency from rising rapidly, this makes the appreciation occur over a long time frame. China has recently indicated it wants the Yuan to appreciate to help fight inflation, currently running at over 7%.
Unlike internationally traded manufactured goods that are often priced in US dollars, services are traded locally and in Yuan. If the Yuan appreciates this will boost returns when converted into US dollars.
While emerging markets tend to be riskier than more established markets the canny investor would be wise to keep an eye on China's service sector.
