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Multinationals Expect Gains With China's New Leadership

Stocks in this article: PG PEP

More importantly for multinational corporations, China will work toward policies that favor overseas manufacturers as some of those once on board leech out to cheaper spots in Southeast Asia.

Factory work made up 43% of the economy as of 2009 but today it's blocked by an emerging lack of private capital, Asia-based economists fear.

Credit Suisse chief regional economist Dong Tao said in an Aug. 20 research report that manufacturing is not profitable because of rising costs and overcapacity. The Purchasing Managers' Index figures for September would support his point.

"The sudden disappearance of private investments has led to a crash in the demand for upstream products," Dong said. "That has gradually spread to downstream and then consumption. Very weak external demand has made the situation even worse."

China needs to cut taxes and open the high-end service sector to private capital to restore manufacturing, he adds, speculating that "it will take time and courage for the leaders of the next generation to tackle the problems."

Not an easy job. But one that well done could give Xi Jinping or Wang Qishan a welcome berth in economic history, certainly above Mao's multiple disasters or Hu's recent inaction.

And foreign companies that have invested in China aren't about to disappear. Consider some of the major American PC makers.

Dell (DELL) pledged in 2010 to grow in China by spending $250 billion on production, procurement and sales by 2020. Its chief American rival Hewlett-Packard (HPQ) agreed this year to set up a factory in the industrial growth hotspot Chongqing and make some 15 million inkjet printers per year.

HP already has more than a 5% share of China's PC market, according to market research firm IDC. Chinese consumers like foreign-brand PCs but have spurned the Japanese competitors of HP and Dell following nationalist protests in September. Dell share prices haven't been lower since 2010, with HP shares falling 73% since their second highest in history that same year.

Both are trading lower because of broader PC industry issues that may take another year to resolve. Analysts recommend holding -- no buys or sells -- shares of either. Hold off until the new Chinese leadership unleashes a powerful micro-processor for its manufacturing sector.

At the time of publication the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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