Investing In China's Roads And Railways

By Aaron Levitt | September 21, 2010 AAA

Recent multi-day traffic jams on China's Beijing-Tibet Expressway highlight the need for the growing nation to build out its transportation infrastructure. Resembling a parking lot, the first traffic jam lasted nine days. Clearing for only a week, more than 10,000 vehicles were stopped once again over a 75 mile stretch of road. After years of break-neck economic growth China has outgrown its transportation systems. The nation's infrastructure is in desperate need of a major overhaul and upgrades. This upgrade represents an opportunity for investors as the Asian Dragon begins spending on this campaign. (Learn more in Investing In China.)

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Big Problems = Big Dollars
A recent IBM (NYSE:IBM) survey reported that 69% of Beijing motorists admitted that on occasion they have just given up and gone home, and that 84% of motorists professed that traffic affected work performance. China's vehicle ownership climbed to 51 million by the end of 2008, up from 1 million in 1977. The nation has supplanted the United States as the largest auto market in the world as more and more citizens rise to the middle class. This problem is compounded as at present only about 40% of China's population lives in cities. However, the rate of urbanization growth is more than double than that of the U.S.

Just as roads have failed to keep up with economic expansion, so has China's railway. Currently, the nation boasts only 78,000 km worth of rail lines. This equates to per capita railway mileage in China of only six cm. Passenger traffic reached 1.52 billion riders in 2009, up by 4.4% versus 2008. Illegal ticket hoarding/sales and day-long delays are common place within the nation.

China, however, is not resting on its laurels. Realizing that transportation has not kept up with its economic growth, the nation has been pumping massive amounts of stimulus into infrastructure. About half of its recent $580 billion plan was earmarked for railways, highways and power-grid construction. In 2009, China spent nearly $103 billion on railway construction, an increase of 69% compared with the previous year. The nation has plans to add 42,000 km of new rail tracks by 2020.

A Picks-and-Shovels Portfolio
For China to continue its fast growing pace, the nation must make improvements to its infrastructure. Recent stimulus spending and additional five-year plans by the Beijing government show the urgency in this matter. Luckily for investors, we have the ability to participate in this growth. Broad-based funds such as the PowerShares Emerging Markets Infrastructure (NYSE:PXR) represent a great play on the global building boom. However, there are plenty of China specific plays.

The EGS INDXX China Infrastructure (Nasdaq:CHXX) is a great way to participate in China's railway and road construction. The ETF follows 30 of the leading Chinese companies related to infrastructure building, including China Railway Construction and utility Huaneng Power International (NYSE:HNP). The fund charges 0.85% in expenses.

Major infrastructure improvements require major amounts of materials. Investors may want to add exposure to the steel and aggregate makers. The Global X China Materials ETF (Nasdaq:CHIM), which follows 28 Chinese materials firms and the Market Vectors Steel ETF (NYSE:SLX) should benefit from continued increase in infrastructure spending. While the PowerShares DB Base Metals Double Long ETN (NYSE:BDD) allows investors to profit off the increased demand for these commodities.

With railroad improvements being a chief concern, both Hollysys Automation (Nasdaq:HOLI) and Guangshen Railway (NYSE:GSH) will benefit. Hollysys produces a host of train-related control software and automation solutions that monitor route condition, track status, train schedules and the distance between trains. Guangshen operates as one of the largest public railroad companies in China, for both passengers and freight.

Bottom Line
The recent mega traffic jams in China underscores the fact that the nation has outgrown its current transportation infrastructure. The Beijing government has realized this and has begun serious spending in its improvement. By positioning portfolios accordingly, investors can profit from this spending. Investors have the opportunity to participate in these stimulus plans by investing through the preceding ETFs and stocks. (Despite some disappointing trucking trends, there is still a lot of opportunity in the industry. To learn more, see The Upside Of Trucking.)

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