Dear Fellow Investor,
It’s been another volatile week in the markets, especially here in the U.S., but the big news in China has nothing to do with their recent performance. Instead, everyone’s focused on a big—and very important—government meeting that's taking place.
It’s the annual meeting of the National People's Congress (NPC), the highest legislative body in Mainland China. The two-week long meeting ends tomorrow, and it sets the tone for Chinese government policies for the rest of the year. As investors profiting from China’s growth, it’s important for us to know what’s happening there. And the news is good.
The NPC is somewhat like the Senate here in the United States, but despite its equal opportunity name—the National People's Congress—it's not quite as democratic. The NPC is made up of 2,835 delegates representing various regional and interest groups. These delegates are elected by smaller governing bodies called provincial people's congresses. The provincial people's congresses are in turn elected by lower-level congresses, and then there are several layers of even lower congresses until you get to the lowest level, where representatives are popularly elected. All of these layers of representatives are very convenient because they enable China's ruling party (the Communist Party) to control and approve who becomes a member of the NPC.
One NPC delegate who may be familiar to you is famed Chinese actress Gong Li, who starred in Miami Vice last year and more recently in Hannibal Rising. Gong and the rest of the members of the NPC meet in Beijing for about two weeks each spring to propose new laws and listen to reports from senior Chinese leaders, such as Premier Wen Jia-bao.
A Victory for the People
I've been watching what's taking place in the meeting, and so far most of the issues the NPC is tackling are pretty mundane. This year’s topics are also very similar to what was discussed at last year's session, such as setting a GDP growth target of 8% (growth was over 10.7% last year, marking the fourth year in a row that it topped 10%), increasing the fight against corruption, helping rural farmers, improving health care, and so forth.
However, the most important issue introduced this year is a positive one. It’s a hotly debated law to protect private property. In a society where wealth is increasing, this landmark law both defines what private property is and protects it from being confiscated or destroyed.
This law is a monumental step that marks China's shift towards capitalism. In the past, the Communist Party owned and controlled all land, but with private businesses now flourishing, savvy businesspeople are demanding the right to control their hard-earned assets. Not surprisingly, the new law is highly popular among entrepreneurs and educated professionals.
This law is getting closer to approval. It will be put to vote by lawmakers at tomorrow’s closing meeting of the parliamentary session, and from everything I’m hearing, it’s expected to pass. I’ll certainly be watching.
Some are saying that the law will be difficult to enforce, and I don't think that passing it will change things in China overnight. But it's a step in the right direction. The law will help Chinese private entrepreneurs compete against state-owned enterprises (SOEs) by safeguarding private sector wealth. It will also help pave the way for more world-class Chinese entrepreneurs, like the ones who are the brains behind some of the companies I’m recommending in China Strategy. For example:
- our very own innovative advertising company (up 161%),
- our education provider (up 60%),
- our online gaming leader (up 59%),
- and our dominant online travel company (up 52%).
The China Miracle is driven by the Chinese people, and I'm happy that the people are finally starting to get the rights that they so richly deserve. As investors, it’s also good news for us. The results of this important government meeting make the opportunities in our current—and future—stocks even more attractive.
Just How Much of a Risk Is China’s Government?
The new law should also help calm a big concern I hear from investors, namely how the Chinese government could negatively impact your investments. This is an important question, and one I get all the time. China is not yet a completely free market economy, so the government’s potential impact needs to be considered with every investment. I do it personally, and I do it with every recommendation I make to my readers.
Let me first clear up one frequent misconception: The Chinese government does not own a piece of every business in China. It only owns large portions of state-owned enterprises. We’ve talked before about how strongly I recommend that you avoid SOEs because most are inefficient and corrupt.
I also steer investors away from areas of the economy where the government either is already a problem or could become one. For example, the government regulated gas prices in China at $1.90 a gallon. You know as well as I do how much oil prices went up, so some companies were losing money because of the price cap. (This is in the process of changing, and I’m recommending one particular company that should be the biggest beneficiary. Click here to learn more.)
The most important point here is that there is a flourishing private sector in China—with both local entrepreneurs and international companies prospering—and that’s where the best opportunities are. China is slowly becoming a much more capitalist-oriented country, so much so that private enterprise is the biggest driver of China’s growth.
Since China’s current constitution was adopted in 1982, it has undergone three important amendments that have strengthened the country’s pro-capitalist course. Let me summarize them for you:
- 1988 Amendments: Formally allowed private economy to exist and grow within limits, but stipulated that it was only a “supplement” to the public sector.
- 1993 Amendments: Introduced the concept of a “socialist market economy” to legitimize the shift towards a full-scale establishment of capitalism.
- 1999 Amendments: Declared that the private sector is an “essential part” of the “socialist market economy.”
As you can see, the government’s official stance has moved dramatically away from the failed Soviet-planned economy models to one that increasingly relies on the private sector. I expect this transition to continue for several reasons: 1. The population now has a taste of what private enterprise can do, and it would be very difficult to turn back the progress that has been made; 2. The government doesn’t want to interfere with the important and growing middle class that is essential to China’s continued growth (as we see with the expected new law); and 3. With the Olympics coming to Beijing in 2008, the government wants to convey a favorable impression to the world.
It’s important to know your risks before you commit your money to any investment, and that’s especially true when it comes to profiting from the China Miracle. China’s government can be a significant risk, so knowing when it’s a problem and when it isn’t are clearly the keys. That’s where my heritage, knowledge of the government and our team on the ground allow me to help you make that distinction and point you to the safest and best investments. Click here to join us today.
P.S. Our stocks are rebounding nicely after the recent sell-off—one is up 13% already from its recent low—and I’m encouraging my China Strategy readers to take advantage of this buying opportunity. Click here now to get immediate access to my very latest advice.
