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Bullish News from the Black Skies over Shanghai

Bullish News from the Black Skies over Shanghai

Believe it or not, the news that hundreds of commercial flights over Shanghai were recently delayed due to excessive pollution is very bullish for China, and the global economy.

A long list of economic reforms were issued from the most recent meeting of the ruling Communist Party. The overall objective was to transform the economy of the People's Republic of China from being a manufacturing behemoth focused on exports to a service economy, responding to the needs of the domestic market.

As China has the world's largest economy in terms of purchasing power, that is very bullish for Coach (NYSE: COH), Coca-Cola (NYSE: KO) and Wal-Mart (NYSE: WMT), among others.

Many of the economic reforms for the world's most populous country are focused on protecting the environment. The news from Shanghai more than makes the point about that urgent need. Propitiating the growth of the service sector will do much to better the local surroundings, especially the skies (think black smoke billowing from the smoke stacks of steel mills powered by coal). About 70 percent of the American economy is focused on consumer demand. For China, it is the opposite.

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The transformation to the service sector guided by market forces will be huge for companies emphasizing the consumer demand in China such as Coach, Coca-Cola and Wal-Mart.

Arvind Subramanian, a senior fellow at the Peterson Institute for International Economics, reported in a study that China has the world's largest economy in terms of purchasing power. In addition to that, China is the biggest buyer of luxury goods, such as items from Coach. As a result, Coach, the maker of luxury handbags and other high-end items, has major expansion plans for China.

So do Wal-Mart and Coca-Cola.

All are moving to profit from the evolving Chinese economy. Wal-Mart is changing its strategy to build up its network in smaller urban areas in China. Coca-Cola is spending billions to increase its presence, with an acquisition campaign, to adapt to local tastes.

A Reuters story about the flights grounded due to darkening pollution reported that, "The incident is especially embarrassing at a time when China seeks to build Shanghai into a global business hub on par with the likes of London, New York and Hong Kong by 2020." For investors, it is useful as it will engender far greater efforts by Beijing to evolve into a service economy that does not pollute nearly as much as one dominated by manufacturing.

From that, there will be much greater demand for products from Coach, Coca-Cola, Wal-Mart and others from around the globe. That will do much to reduce the trade imbalance China has in trading with other nations. In addition to improving the environment, it will also increase economic growth in many other countries due to the burgeoning demand from about one-fifth of the world's people.


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