Dear Fellow Investor,

This summer has been a rough time for investors. After a period of extreme volatility, the market bounced back last week only to become choppy again this week. Despite all of the up-and-down action, many of our China Strategy stocks have been shooting straight up over the past two weeks. Since mid-August, our aluminum monopoly has popped nearly 60%, and several other stocks in our portfolio have enjoyed gains of 20% or more!

In this week's Inside China Dispatch, I want to talk about what has been pushing shares of Chinese companies so high. We'll also look at several stocks that will benefit from recent developments in China no matter what happens with the subprime credit situation.

Arbitrage and Hong Kong Boost Chinese Shares

For the past several months, I've been telling my China Strategy members about arbitrage opportunities between Shanghai-listed A-share stocks and their Hong Kong-listed H-share counterparts. Dual-listed companies, such as our aluminum monopoly, our major insurer, our oil and gas supplier and our power play, all have Hong Kong-listed shares trading at a 40%–70% discount to their Shanghai-listed shares.

Arbitrage is finally happening, and the discount in Hong Kong's shares will work to our advantage. Last week, I told you about an important new pilot program in China that would allow Mainland Chinese money to invest in Hong Kong's markets. Sophisticated institutional and high-net-worth investors in China have already started selling pricey Shanghai stocks and buying cheaper Hong Kong shares in their place.

The U.S.-listed ADRs that we invest in at China Strategy are backed by Hong Kong-listed shares, so we are directly benefiting from the Chinese money that's moving into Hong Kong's market.  That's one of the main reasons why our China Strategy stocks have climbed so rapidly over the past week. Click here to get immediate access to my complete China Strategy portfolio so that you can share in our gains.

The second reason why our stocks have skyrocketed is that there's another group of companies benefiting from the new policy. This group is made up of well-known Chinese companies that are listed in Hong Kong but not in the Mainland. Chinese investors have known about these successful companies for years, but have never had direct access to their shares—until now.

Two of the companies that Mainland Chinese investors can now buy for the first time are part of our China Strategy portfolio. The first is China's largest wireless service provider, which is already up more than 150% for my China Strategy readers. The second is our offshore drilling giant, which is up more than 80% for my subscribers. Both are top Chinese blue-chip companies that are household names in China. Many Chinese citizens will buy shares for their portfolios to add diversity. I expect these two stocks to continue soaring as Chinese investors purchase their shares listed in Hong Kong. To learn more about these two winning Chinese blue-chips, click here now.

Further Proof that China Is Outperforming

Aside from the H-share arbitrage finally playing out, August has brought further evidence that China is establishing itself as an independent financial force. To show you how well China has performed during this bumpy summer, I put together a table comparing China with other international markets.

The table below shows the performance of the U.S. markets and the major Asian markets. I started tracking the exchanges on July 19—the day when the Dow closed at an all-time record high above 14,000—and I stopped tracking at yesterday's close.

Country/Region	Index	July 19 Close	August 29 Close	Performance
U.S.	Dow Jones	14,000.41	13,289.29	-5.1%
	S&P 500	1,553.08	1,463.76	-5.8%
Brazil	Bovespa	58,125.00	52,734.64	-9.3%
Mainland China	CSI A-share Index	3,807.00	5,171.82	35.9%
	Shanghai A-share Index	3,912.94	5,109.43	30.6%
Hong Kong	Hang Seng Index	23,016.20	23,020.6	0.02%
India	Sensex	15,550.13	14,993.04	-3.6%
Japan	Nikkei 225	18,116.57	16,012.83	-11.6%
Russia	RTS Index	2,071.08	1,871.54	-9.6%
Singapore	Straits Times	3,604.62	3,334.66	-7.5%
South Korea	KOSPI	1,937.90	1,826.19	-5.8%
Taiwan	Taiex	9,473.31	8,643.32	-8.8%
The closed-end A-shares fund in our China Strategy portfolio	NYSE	$41.82	$52.90	26.5%

 As you can see, China's A-shares have significantly outperformed the global exchanges. (And our China Strategy A-share investment, the closed-end fund that trades on the NYSE, rode the coattails of this strength, gaining an impressive 26.5%.)

China's A-shares are benefiting from the incredible amount of excess liquidity in China's financial system. China has one of the highest savings rates in the world—a staggering 35%. There is currently more than $3 trillion in the Chinese banking system, and investors there are putting that money to work in the stock market.

Billions of dollars continue to pour into China each week from trade surplus, direct foreign investment and portfolio investment. All this liquidity puts pressure on the Chinese yuan to appreciate, and Beijing wants to direct some of the funds into the Hong Kong stock market. The overwhelming amount of liquidity created in China is enough to propel both the Mainland Chinese stock market and the Hong Kong stock market higher.

That's why it's crucial for you to identify and invest in the best Hong-Kong backed Chinese ADRs that the U.S. has to offer. Join us at China Strategy today, and I'll tell you which stocks will benefit the most from this exciting new development in China.