Is there no patriotism left, even in the White House?
At the second presidential debate, President Barack Obama pointed out that Mitt Romney's gilded pension includes investments in China, which some people consider to be America's economic arch-rival. Then Romney charged that Obama was guilty of the same sin. "Mr. President, have you looked at your pension?" Romney taunted. "You also have investments in Chinese companies."
Obama parried the question by joking about the diminutive size of his pension, compared with Romney's. But he didn't deny Romney's assertion, for good reason: Virtually every American with a retirement plan or investment portfolio has a stake in the Chinese economy, whether they realize it or not.
I analyzed my own 401(k) plan (which is a great deal smaller than even Obama's pension) to get a sense of my own investments in China. Like most Americans, I've never directly bought shares in a Chinese company. A breakdown of my plan by Fidelity, which manages it, reveals that the majority of my pension is invested in domestic stocks, through mutual funds. Much of that is invested in an index fund meant to mimic the S&P 500 stock index. Three percent of my pension is invested in foreign stocks, which was news to me until I looked it up. Other than that, there's no indication of Chinese investments.
Until I look deeper, that is. My modest portfolio includes stock in iconic American companies like Apple, Exxon Mobil, Microsoft, General Electric, Google and IBM. Uh-oh. It's well-known that Apple contracts out its assembly work to companies such as Foxconn, a huge Chinese employer that has been accused of abusive labor practices. I checked GE's annual report, and while GE doesn't break out its holdings by country, it does say that "Pacific Basin" revenue accounts for 16 percent of total sales, and that revenue in China grew by 28 percent in 2011.
General Motors, another company represented in any S&P 500 index fund, is more forthcoming. Its annual report reveals that it sold 2.5 million vehicles in China in 2011, making it No.1 in market share. GM earned $3.2 billion in profit in China, on sales of $30.5 billion. Hey, that's not bad!
Oh, but wait, I'm supposed to be outraged by that, and dump my mutually owned GM stock, along with the shares of any other company that does business in China.
There's only one problem with that: It's virtually impossible to do. The global economy has become so interconnected that nearly all big companies have foreign operations, and China's rapid growth makes it a market that's too big to ignore. The companies in the S&P 500 index — which are all American — get roughly 40 percent of their revenue from overseas, a portion that will probably rise in the future, since many foreign markets are growing much faster than the U.S. economy.
Big companies tend to be circumspect about their business dealings in places like China. On one hand, they need to let investors know they're in the game there, since it's one of the world's fastest-growing markets. But they're also reluctant to draw unnecessary attention to their China operations. IBM's latest annual filing with the Securities and Exchange Commission only contains the word "China" three times, for instance, which seems pretty odd for a huge company that earned 24 percent of its revenue from the "Asia Pacific" region. (The word "global," which appears more than 60 times in that filing, seems to serve the purpose.)
Patriotic investors who manage their own portfolios could try to target assets that seem more purely American. Many U.S. healthcare firms, for instance, tend to earn most or all of their revenue domestically, since healthcare by its nature is a local business. But most healthcare firms still buy equipment or supplies that are made in China. That leaves Treasuries and other U.S. government securities. But this sort of approach could be costly, since it ignores a basic dictum of investing: Diversify. It could also generate poor returns, since some foreign economies are growing a lot faster than the mature U.S. market.
Americans who aren't fortunate enough to have a pension or investment portfolio may feel a bit more patriotic, if only by default. But they patronize China if they've ever shopped at Wal-Mart, Target, or any major retailer, for that matter. Chinese-made goods are everywhere, and while the shift in manufacturing to China has clearly cost some U.S. jobs, it has also helped lower the cost of many products, from everyday items like shoes and shirts to electronics, appliances and automobiles. That's one of the big reasons annual inflation hasn't risen above 4 percent once over the last two decades.
Presidential candidates routinely bash China while they're running for office, then take a more pragmatic approach toward this controversial, yet indispensable, nation once they actually have to govern. So don't expect either of this year's candidates to sell his China holdings. You probably shouldn't, either.
Rick Newman is the author of Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.