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Economics: China Roars!
New York: March 31, 2004
By John R. Stephenson

It's hard to turn on the news these days without hearing something about outsourcing and its impact on the American worker. But, at the same time, company profits are edging up and in particular commodity based companies have come out of decades long hiatuses to newfound glory. One of the primary reasons for this strong growth? China, which has been growing (unofficially) at about 12.5% a year. This is truly staggering and yet — it is only the beginning.

China now has a larger economy than Britain and with mass migration into cities (some 20 million a year), it is rapidly industrializing. China is already the second largest oil market in the world with consumption of some 6 million barrels a day and analysts are estimating that by 2010, Chinese oil consumption could hit 12 million barrels a day. Consider the demand consumption that China has on a worldwide basis for the following commodities:

> Crude Oil 7%
> Aluminum 25%
> Steel 27%
> Iron Ore 30%
> Coal 31%

Not only is the demand for commodities significant today, it is likely to get even stronger in the future as the country continues to industrialize and an expansion in consumer credit drives demand upward. The country has still a long way to go in terms of industrialization with some 49.2 percent of the GDP (in 2002) accounted for by agriculture. But rest assured that with a per capita income differential between urban residents and rural dwellers expanding to 3.1:1 there will be ample incentive for people to continue to move into the cities. Today, only 5% of the Chinese populace can afford to buy a car and the per capita income is still considerably smaller than that of the United States and South Korea when those two countries industrialized. There is considerable room for increased consumption in China, not only from the process of industrialization, but from the development of a consuming middle class. China is starting from a lower base than other countries (in terms of per capita income) that have industrialized recently but it is many times their size.

No, without a doubt, China will continue to be a dominant story in the months and decades ahead as it continues to industrialize and its citizens come into their own as consumers. The likely winners in such a scenario? Commodity and raw material producers where China is not self sufficient in the raw material supplied. Copper is one such example and Phelps Dodge could be a likely winner. Another possibility its YUM Foods the owners of the KFC, Pizza Hut, Taco Bell and A&W restaurant brands which has a significant toe-hold in China and should continue to do well as the wealth of the Chinese consumer grows.

StephensonFiles is a division of Stephenson & Company Inc. an investment research and asset management firm which publishes research reports and commentary from time to time on securities and trends in the marketplace. The opinions and information contained herein are based upon sources which we believe to be reliable, but Stephenson & Company makes no representation as to their timeliness, accuracy or completeness. Mr. Stephenson writes a regular commentary on the markets and individual securities and the opinions expressed in this commentary are his own. This report is not an offer to sell or a solicitation of an offer to buy any security. Nothing in this article constitutes individual investment, legal or tax advice. Investments involve risk and an investor may incur profits and losses. We, our affiliates, and any officer, director or stockholder or any member of their families may have a position in and may from time to time purchase or sell any securities discussed in our articles. At the time of writing this article, Mr. Stephenson may or may not have had an investment position in the securities mentioned in this article
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