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The Monsanto of China

In 1889, Gustave Eiffel built a tower for the Paris World’s Fair that was a marvel of engineering and the world’s tallest building, and would eventually become a graphic symbol of France itself. Four years later, in 1893, the Chicago World’s Fair opened in what, by many accounts, was a grand...

In 1889, Gustave Eiffel built a tower for the Paris World’s Fair that was a marvel of engineering and the world’s tallest building, and would eventually become a graphic symbol of France itself.

Four years later, in 1893, the Chicago World’s Fair opened in what, by many accounts, was a grand gesture to beat the Parisians at their own game. The Chicago fair attempted to impress America’s greatness on the world with its own eponymous steel structure, built by George Washington Gale Ferris Jr. (And it was a whopper even by today’s standards, at 264 feet tall, with a capacity of 2,160. Today’s tallest Ferris wheel is 541 feet tall but carries only 784 passengers.)

Then with the completion of the Chrysler building in 1930, the U.S. claimed the tallest building title as well. A mere year later, the Empire State Building surpassed Chrysler’s milestone by 428 feet. And it held the record until 1972, when it was bested by another New York tower, the World Trade Center. For most of the 20th century, America was the undisputed king of skyscrapers, home of all 10 of the world’s tallest buildings until 1990.

But then something changed. Today, only two of the top 10 of the world’s tallest buildings are in the U.S. (both are in Chicago.) The other eight are all in the Middle East and Asia (and Eiffel’s glory is long past; none of the top hundred are in Western Europe, though 56 and 99 are in Moscow.) So what gives? After over half a century of complete dominance of the lower upper atmosphere, it would seem that America just gave up. Why?

The simple answer is national pride. The Chicago World’s Fair, the first Ferris wheel and the Chrysler and Empire State Buildings were all built at a time when America was rising to global prominence, and determined to gain the respect and admiration of the world. Europe and Eiffel were the old guard; they’d had power and the world’s respect for centuries. America was an upstart determined to prove its importance-and engineering masterpieces are a very visible way of showing off your country’s power, creativity and cultural relevance.

And it worked: For most if not all of the 20th century, America was economically, culturally and politically the world’s undisputed top dog.

So what does it mean that only two of today’s top 10 tallest buildings are in the U.S. ... and that six are in China (including Taiwan and Hong Kong)?

Simply, it means China cares more than we do-a lot more-what the world thinks of it. China is the economic powerhouse of tomorrow-and to some extent, today-but its poor Communist past is still vivid in the world’s memory. If international relations were a high school popularity contest, China would be the ugly duckling in your graduating class who just turned up at your 10-year reunion in a Maserati.

Except instead of a sports car, China has six of the world’s tallest buildings, and four more future top-tenners under construction. At 2,126 feet, the Pingan International Finance Centre in Shenzen will likely be the world’s second-tallest building upon completion, expected in 2015. (The tallest is the Burj Khalifa in Dubai, which, at 2,717 feet, is unlikely to be bested anytime soon. The Burj is a sort of cautionary tale in the world of nationalist skyscraper-building: Originally named the Burj Dubai, it was rechristened in honor of UAE president Khalifa bin Zayed Al Nahyan after he bailed Dubai out of a financial crisis brought on largely by over ambition. It now sits largely empty.)

In another parallel of early 20th-century America, China is also building the world’s largest Ferris wheel in Beijing. It doesn’t take a genius to see that the Middle Kingdom is in much the same place as the U.S. at that time: An economic powerhouse determined to curate an equally powerful and respectable cultural and diplomatic reputation among its international peers.

Interestingly, the U.S. is currently building what looks like the exception that proves the rule in downtown Manhattan. There-on a piece of land that has become a symbol for more national pride than the Statue of Liberty, the Washington Mall and the Liberty Bell combined-we’re building a skyscraper that would be the second-tallest in the world if it were completed tomorrow. Of course, it probably won’t be done until 2013, at which point it will still be in the top 10 worldwide, as well as being the tallest building in the U.S. at a historically symbolic 1,776 feet. If anything, One World Trade Center confirms the skyscraper’s symbolic status as a proxy for national importance. After practically backing out of the competition for two decades, the U.S. with its One World Trade Center tower confirms that in the face of a challenge on the international stage, there’s nothing like a really big tower to make your country’s dominance clear.

While China’s ambitions may be threatening to the U.S. diplomatically, they can mean profits for you as an investor. China’s skyscraper binge is no feint. Unlike Dubai, China’s economic reality backs up its big statements. The country’s awesome GDP growth is well known, and its three billion people’s gradual ascent to the middle class has already made many fortunes. My own personal favorite statistic about China is that the country has more Internet users today than the U.S. has people.

Chinese stocks have faced some turbulence recently, for a variety of reasons I won’t rehash here. However, the vast majority of investment experts recognize these as temporary speed bumps. China is still one of the most popular investment themes for the coming year.

Near the beginning of the year, Yiannis G. Mostrous, Editor of Global Investment Strategist, wrote the following about investing in Asian emerging markets:

“Emerging markets, as measured by the MSCI Emerging MXEF Index, have outperformed world markets for the past two years in U.S. dollar terms. In 2009, the emerging-markets benchmark outperformed the MSCI World Index by 32.7% and by 5.4% in 2010. After two years of gains, some investors may question whether emerging markets can continue to outperform the rest of the world. They will.

“Emerging markets, and Asia in particular, have recovered from the financial crisis with strong balance sheets. This was achieved by generally low levels of household debt and strong economic growth. Asia’s performance in the recent crisis was also helped by the reforms it undertook in 1997 to 1998, a cathartic process that helped the region repair both corporate and government balance sheets. As a result, emerging economies boast current account surpluses, which make it easier for their governments to implement economic growth-related projects and outright financial assistance.

“Global industrial production is also strengthening, which is always good for emerging markets.

“Asian markets remain relatively cheap when one accounts for the strength of their economic growth and their robust corporate balance sheets. The MSCI AC (All Country) Asia ex-Japan Index trades at about 2.1 times the trailing book value, slightly higher than the 15-year average of 1.8. In addition, the index trades at about 15 times trailing earnings, also only slightly higher than the 15-year average of 14. Although valuations are not at their lowest levels, nor are they particularly high. Long-term investors should continue to buy into Asian markets-especially during periods of weakness.”

ETFs and indexes like those Mostrous mentioned above are one way to invest in emerging markets-but individual companies have much greater potential. One I’ve been keeping an eye on recently is a little company named Origin Agritech (NASDAQ: SEED).

The Agri-Food Value View Editor Ned W. Schmidt had this to say about SEED in the December 15 Dick Davis Investment Digest:

“Origin Agritech produces corn, rice, cotton, and canola seeds for the Chinese market. It has announced significant advances in both development and licensing of genetically modified seeds. One of those announcements gave the stock a spike up at the end of 2009. Investor reaction to the announcement was excessive. SEED is China’s Monsanto, but very early in its life cycle. Company revenues are only about US$90 million. That small size, the fragmented nature of the Chinese seed market, the difficulties in establishing a reputable and reliable dealer presence, and the volatility of prices in the past few years have made SEED’s operating results extremely variable, more so than many investors had expected. ... That volatility should be reduced and growth enhanced by the long-term trend in China of moving from micro-farms, tiny, to macro-farms, larger. Larger farm operations will want reliable seed at a profitable price, replacing the volatile buying habits of tiny farms. ... When the stock is undervalued, it should be added to portfolios.”

SEED is low-priced, prone to volatility and has minimal institutional ownership-it’s not a good pick for conservative or risk-averse investors at this time. However, it has great potential. China’s increasing demand for food is a recurring theme among Digest contributors, and Origin Agritech is a prime beneficiary of that demand. If you can buy low and sit tight through the stock’s growing pains, I expect you’ll be well rewarded.

Wishing you success in your investing and beyond,

Chloe Lutts

Editor of Investment of the Week

Chloe Lutts Jensen is the third generation of the Lutts family to join the family business. Prior to joining Cabot, Chloe worked as a financial reporter covering fixed income markets at Debtwire, a division of the Financial Times, and at Institutional Investor. At Cabot, she is a contributor to Cabot Wealth Daily.