Dear Fellow Investor,

One of the keys to being a successful investor is flexibility. This is extremely important today, as the investment climate seems to change on a regular -- if not daily -- basis.

When the investment environment changes like this, you must be willing to adjust your strategy accordingly in order to be investing in the most profitable opportunities. I recently reassessed my China Strategy investment strategy pertaining to Chinese state-owned enterprises (SOEs) in light of the recent changes in the financial markets and Chinese economy.

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If you've been reading Inside China Dispatch for a while now, then you know that I have generally been against the strategy of investing in most Chinese SOEs. My main reason for avoiding SOEs was that I saw more opportunities in private sector companies and a few SOEs with government-sanctioned oligopolies.

I particularly didn't think that SOEs stood a chance at competing against highly motivated private entrepreneurs. And for the most part, I was right. Most SOEs have struggled to keep up with private companies in recent years.

Today, though, my strategy has changed.

An Adjustment in Strategy

The world is facing a tough economic picture, and the only way for most nations to overcome economic slowdowns and recessions is strategic government intervention. We've already seen this occur in the United States, as our government stepped in to support financial institutions by flooding them with funding.

And this is happening in China as well. The Chinese government has taken aggressive moves to stimulate economic growth in the country through its stimulus plan and bold rate cuts. In addition to these steps, China's policymakers will not let government-favored SOEs collapse.

Beijing will support these companies, preventing them from failing. When state-owned companies are beaten down due to deteriorating earnings, the Chinese government is more inclined to step in and support them over private businesses.

That's why I've recently adjusted my investment strategy in China Strategy to reflect this change in the companies that will spur China's economic growth forward in 2009. Just look at how some of China's top SOEs have performed in the past four weeks:

• China's number-one producer of aluminum, up 93%
• China's leading coal miner, up 91%
• China's leading offshore oil driller, up 62%
• One of China's largest petrochemical enterprises, up 41%
• China's leading wireless service provider, up 34%

You just can't ignore gains like that!

And we're likely to see more gains like this in the upcoming months. Why? Because I'm expecting the Chinese economy to rebound in the second half of next year. And since equities tend to rally six months before the economy really picks up speed, now is the time to be purchasing shares in strategic Chinese companies.

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What SOEs Present the Best Opportunities?

Now, with that said, not all SOEs are good investments right now. I'm currently recommending a few companies in my China Strategy service that should benefit from government support in 2009. And my top three SOE picks have performed well since I've recommended them, and as we move into the New Year, they should outperform many privately-run businesses.

• China's Leading Wireless Service Provider: This company is up 101% since I recommended it, and continues to expand its reach across China. In fact, in October, this wireless service provider added 7.2 million mobile subscribers. Now, the company's subscriber base is 443.3 million people. As 3G gains more acceptance in China, this company will likely continue to outperform.
• China's Leading Producer of Aluminum: This company is no stranger to the China Strategy buy list, as we sold it back in 2007 for a 285% gain. And now, since I recommended it in November, the company is up 69%. China currently consumes one-third of the world's aluminum and alumina, and with China's new stimulus package spurring on infrastructure projects, the country's aluminum demand is project to grow 15%. And this company will be at the forefront of supplies.
• China's Largest Airline: This company popped 32% last week after the Chinese government bought $437 million worth of shares of its parent company. This was a smart move by the Chinese government as it will help support this airline during this tough economic period. In addition, as this company continues to benefit from industry consolidation and a decrease in fuel cost, we should see it improve its business and its shares move even higher.

As you can see, there are strategic ways to take advantage of the support the Chinese government is offering to SOEs during this tough economic time. And particular SOEs, like the ones mentioned above, are one of the best ways to take advantage of China's continued economic strength in the New Year. To learn how you can profit from this trend, join China Strategy today.

Robert Hsu

P.S. Due to the Christmas holiday next Thursday, you will receive your Inside China Dispatch on Wednesday, December 24. Happy Holidays!