China has built too much infrastructure
Much like what can be compared to the United States’ housing boom and bust, China has more housing supply than there is demand. Led by China’s government, it has been on a building boom for many years. The idea has been that the huge supply of money from exports needed to be invested somewhere.
The smart place to invest is infrastructure, that’s not a doubt. But at some point, China decided to continue to invest in infrastructure without questioning its return on investment. Now there are malls and skyscrapers that are completely empty. And it’s fair to question whether tenants will ever occupy some of these structures.
The high degree of commodity purchasing for construction-based raw materials by China is slowing down. Building projects are coming to a halt. It’s slow moving, but entirely possible that the boom in construction on mainland China is drying up. This could cause serious economic problems for the country and investors. The question is what to do to avoid this risk in China’s economy.
Stay away from banks
It’s really hard to tell what is going on with China’s banks. The big problem with banking on the mainland is that it is so intertwined with the government. It’s a major risk since it could be heavily involved with the real estate problem in China. Companies like the China Life Insurance Company Ltd. (ADR) (NYSE:LFC), which is traded on the New York Stock Exchange, is an example of a U.S. publicly traded company that is fully intertwined with China’s troubling real estate problem.
China Life Insurance Company Ltd. (ADR) (NYSE:LFC)’s financial situation looks good on the outside, save for a $2 billion third-quarter loss last year. But with the company being so closely involved with Chinese banks, one has to be careful. Remember, no one thought that AIG was tangled up with the U.S. housing problem until they were completely short of hundreds of millions to continue their operations, which ultimately required a bailout.
Mobile
The mobile factor is incredibly important in China, as the personal computing revolution is being skipped over with a majority of Chinese in favor of smartphones. And instead of the pricey strategy of subsidizing phone costs, China Mobile Ltd. (NYSE:CHL) smartly requires its customers to purchase phones outright and then pay for minutes. This is sometimes done with a plan, but needs to be “recharged” with allotted minutes and texts.
The company has a huge share of the Chinese market since it is state-owned. Rival China Unicom is also supported by the Chinese government and means that China Mobile Ltd. (NYSE:CHL) enjoys very good competitive advantages in this environment. The company provides great long-term value for investors, despite any economic problems China might experience. They could conceivably have a small revenue reduction related to economic troubles, but it is unlikely to drastically reduce their revenue growth.
Search technology
Google has long struggled with China because of censorship. That’s created quite a loggerhead between the two sides. It has resulted in lackluster financial performance for Google in China, even though they have been able to carve out a Chinese niche in mobile. But, the tremendous upside has been afforded to Baidu.com, Inc. (NASDAQ:BIDU), which has happily complied with the Chinese government’s censorship requirements for search results.
That has essentially made Baidu the Google of China. Baidu’s revenue numbers keep increasing quarter over quarter. Just like Google, a lot of Baidu’s revenue comes from online advertising, a market that Google derives tens of billions of dollars from. And Baidu has been able to handle competition well, as the Chinese search engine enjoys a huge piece of the Chinese search pie. Many have reported that it has a dominating 75% share.
Bottom line
There are not many investments that can be made in China through the U.S. stock market. But for the time being, that might be a good thing given the problems that they face in real estate. While American companies like Google might seem to be good bets for the future of China, homegrown alternatives will likely pay off better in the long run.
Look for eventual reforms in the way China operates because of what will happen with their problems in their real estate market. It appears that both China Mobile Ltd. (NYSE:CHL) and Baidu are good investments for the long-term because of this.
The article Navigating China’s Potential Debt Bomb originally appeared on Fool.com.
Daniel is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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