Invest in a Small-Cap Way to Clean up China

Dec 18th, 2007 | By Penny Sleuth Contributor | Category: International

The sun rises over Shanghai, cresting the towering skyscrapers that have become a signal of China’s recent rapid growth. The morning sun brings rise to a new day in a country where over one billion people have recently awoken from their long economic slumber. Like any other day, this one will be spent producing the products that we in the U.S. use every single day.

It is no secret that the U.S. is currently operating under a trade deficit with China. As it stands right now, the U.S. imports $202 billion more than it exports from China. There are several intrinsic reasons for the deficit. The population of China is more than four times that of the U.S. That means that China has an overabundant work force.

China also does not have the wage controls that we are used to in the U.S. Over 100 million members of the Chinese labor force live in rural areas and are forced to commute to industrial areas and compete for factory work. This drives the already low wages down even further. The cost for companies to produce their products can remain much lower compared with those costs in the U.S.

American consumers have fallen in love with the influx of cheap products that continue to roll in from China. This has added to the great demand for Chinese-produced items, which has energized China’s once Stone Age economy. With the economy in full swing, China has been able to become the industrialized and modern nation that we have seen.

A Growing Concern — Paying the Price for Success

This kind of growth does not come without a price. With the rise in the industrialization of its factories and other means of production, along with general and sweeping lifestyle changes of its population, China has now become one of the leading consumers of foreign oil. This is straining the already dwindling world oil supplies, while sending the global costs skyrocketing past record highs.

China also does not pose strict environmental and pollution restrictions on its manufacturers the way we do. This only adds to the ease and affordability of Chinese production, while doing nothing to curb the use of fossil fuels and other polluting energy sources.

The problem with China’s overuse of energy has many components. Chief among them is the ongoing free-rider problem that has come no closer to being corrected: Individuals receive all the benefits of cheap energy while paying almost none of the cost. While one individual or firm can do little on its own to correct the free-rider problem, the Chinese government is doing even less.

But, that will soon change. Some day in the near future, enough pressure both internationally and domestically, will force China to clean up its act. In fact, this is a subject you may already be familiar with. One of your editors, Greg “Gunner” Guenthner, wrote about this a few weeks ago.

In his article, he mentions two companies that have already seen big gains. However, he’s always looking for ways to play this growing concern. We can expect plenty more where this came from…

Until next time,
Jamie Ellis
December 18, 2007

P.S.: Gunner recently recommended another type of “cleaning” company to his exclusive Bulletin Board Elite readers a few weeks ago. This tiny over-the-counter company is on path to grow exactly like Blockbuster did in the mid-1980s. Blockbuster grew from nothing into a NYSE giant that has brings in over $5.5 billion a year. Through a similar acquisition plan, this tiny “cleaning” company is about to do the same, yet it still sells for under a buck a share.

Penny Sleuth Contributor

The Penny Sleuth also features commentary by other financial analysts, small-cap experts, investment gurus and an array of contributors from various fields and occupations. Their diverse insights and contrarian investing ideas are hand selected by the Penny Sleuth editors.

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