How You Can Profit from China’s Democratic Revolution

I’ll be blunt. I have no time for Communists.

Theoretically, Communism is just plain dumb. But on a practical level, it’s even worse.

On a recent trip to Vietnam I had some unpleasant run-ins with Communist officials.

In Ho Chi Minh City Airport a snotty-nosed young man in a green uniform, red epaulets and an oversized peaked cap started barking at me and banging his fists on his desk after I politely asked him if there was a cash machine nearby.

And while visiting Ho Chi Minh’s mausoleum, a Vietnam People’s Army guard threatened to throw me out on the street unless I took my hands out of my pockets.

There was a threatening undertone to both exchanges and the kind of arrogance you would expect from a regime that routinely denies citizens basic rights.

Luckily, Communism’s days are numbered – at least if leading emerging markets expert Charles Robertson of Renaissance capital is to be believed.

Robertson predicts China could be a democracy by 2017.

How does he know?

He has based his call off well-known studies of the links between rising incomes and the transformation from autocratic regimes to democracies.

According to Robertson, democracies become “immortal” after per-head GDP – a country’s total economic output divided by the number of citizens living there – rises above $10,000.

And by 2017, based on current growth levels, Chinese per-head GDP should be in the region of $15,000.

The Middle Class Always Want More Political Rights

The thinking behind this claim is simple enough. Once we have enough to eat, have a roof over our head and are thinking about buying a car, we start to demand political rights, too.

There’s good evidence to support this. For instance, only five democracies above the $6,000 income level have “died.”  These were Greece in 1967, Argentina in 1976, Iran in 2004, Thailand in 2006, Venezuela in 2009.

But after looking at nearly 150 states, Robertson’s research revels that there is no case of a democracy collapsing once it has achieved per head annual incomes of $10,000.

Meanwhile, autocracies have less chance of becoming democracies than vice versa up to the $3,500 per-head GDP level.

There are exceptions – big Middle East energy exporters for example. But these states don’t have to rely on taxes to survive. They can fund spending from energy exports.

So overall Robertson’s prediction is pretty sound.

It’s All Part of the Current Growth “Super Cycle”

This is part of the current “super cycle” of growth I’ve been banging the drum on recently – the high growth phase driven by an exploding middle class, rapid industrialization and urbanization in the emerging economies.

And it offers far-sighted investors one of the best opportunities to profit in a generation.

Right now the emerging economies – places like India, China, Brazil, Turkey, Russia, Indonesia and South Africa – are playing catch up to the West’s standards of living.

Incomes are growing fast. And this is leading to massive opportunities for business targeting the emerging world’s middle class consumers.

But eventually the emerging world will have “caught up” to the West. The big income gap will have closed. And the world will come under new pressures – like resource scarcity, pollution and climate destabilization.

So now is the time to act, not when the emerging middle class have already caught up.

A New Growth Phase

Adding democratization into the mix could rapidly speed up the pace of growth in places like China and Vietnam. In Taiwan and South Korea, for example, per-head GDP continued to rise by about $1,000 a year after democratization.

One of my favorite ways to play the long-term trend toward Chinese growth is by adding exposure to the Chinese currency, the yuan.

You can do this easily by way of the Wisdom Tree Dreyfus Chinese Yuan Fund (NYSE:CYB).

This seeks to achieve total returns reflective of both money market rates in China available to foreign investors and changes in value of the yuan relative to the dollar.

As China’s economy grows and its trade with the rest of the world become more important, CYB will rise in value – whether or not democracy arrives in Beijing.