China’s economic emergence—the greatest economic boom in the history of the world—is filled with both enormous opportunities and wealth-destroying hazards. My goal is to help you profit from the China Miracle, and to do that successfully, you need to know both the right stocks to invest in as well as the stocks to avoid.

Many investors already trying to make money from China’s unprecedented growth have actually lost money by trusting naïve fund managers or following advisors who don’t understand the unique dynamics behind Chinese companies, the government and the markets. Most fund managers and advisors do not fully appreciate the risks unique to China—things like a lack of shareholder rights, low corporate governance standards and an undeveloped legal system.

Lots of unwary investors have been burned over the last few years. I don’t want that to happen to you. So please take the next few moments to learn how you can profit from China’s economic re-emergence while avoiding the dangers.

Profit from The China Economic Miracle

I have always been passionate about two things: China and financial markets. Born in Taiwan to Chinese parents, China is in my blood. After I moved to America as an eight year-old, I continued reading Chinese newspapers every day to keep up with developments in Taiwan, Hong Kong and China.

My interest in China grew as I got older, graduated from college and entered the hedge fund business to pursue my other passion – financial markets. I traded a wide range of markets including currencies, bonds, equities and commodities.

As a hedge fund portfolio manager at Wall Street powerhouse Goldman Sachs, I learned from some of the finest investors in the world, and managed to amass a seven-figure personal nest egg by the time I turned 30. In 2004 I started my own shop - Absolute Return Capital Advisors, LLC., - a money management firm that applies hedge fund strategies to traditional managed accounts.

In my new China Strategy service, I have the opportunity to combine my twin passions and help investors like you profit from the amazing economic transformation taking place in China.

In October of 2003, two of my former colleagues at Goldman Sachs – Dominic Wilson and Roopa Purushothaman – wrote a research report called Dreaming With BRICs: The Path to 2050 that shook international financial and political circles. BRIC is an acronym for the four largest emerging market economies in the world – Brazil, Russia, India and China.

According to the report, China will surpass the United States as the biggest economy in the world by 2041. Strong Chinese demand for natural resources will drive up commodity prices and bolster natural resource-rich emerging market economies.

Soon after the prescient report came out, political and business leaders around the world changed their global strategies to reflect the economic emergence of China.

Silvio Berlusconi, the multibillionaire Prime Minister of Italy, urged other developed country leaders to include Chinese and Indian finance ministers in future G8 summit meetings. Toyota Motors’ new investments in China will increase car production in BRIC countries by 1,000% before 2010. In February of 2005, the National Security Council and the CIA reported that the world will enter a new economic era centered around Asia by 2020.

Here are some facts behind China’s economic emergence:

• China’s economy has been growing at a rate of 9.3% per year during the past 25 years, which is three times as much as the growth rate in the U.S.
• China is the world’s biggest consumer of steel, cement, coal, copper, gold and even meat. It is the number two crude oil consumer.
• China is also the world’s biggest market for mobile phones, with close to 400 million handsets and cellular phone accounts.
• Since 2002, China is the driving force behind the big commodity boom. Prices of oil, copper, gasoline, aluminum and other raw materials more than doubled. The Goldman Sachs Commodity Index is up 180% since 2002.
• The central banks of China, Hong Kong and Taiwan - which make up the Greater China region - combined have the largest foreign reserve in the world.
• The Hong Kong’s H Share Index, which is made up of higher quality companies from Mainland China, was up about 170%, versus 36% for the S&P 500 Index, from 2003 to 2005.

In this report, I’ll share with you both some rules for avoiding the pitfalls that snare typical investors as well as some specific companies to stay away from. Plus, I’ll tell you about my top three strategies for making money from China-related investments in the second half of 2006.

In general, the stocks you want to avoid fall into two categories:

1) Chinese stocks that are dangerously vulnerable to market or governmental pressures, and

2) American stocks wrongly hyped as “China plays” by analysts who have no idea what is really happening inside China.

Let’s get started.

Avoid Most State-Owned Enterprises

State-owned enterprises (SOEs) are exactly what they sound like: corporations owned by the Chinese government, many of which are publicly traded. They still make up the majority of China’s largest businesses. However, government ownership for most of them is a liability.

You see, in recent years, China has been transitioning from a government-planned economy to a market economy. This has created enormous opportunities for private businesses while at the same time harming the bloated, inefficient SOEs that are not used to responding to the marketplace.

That’s why, despite China’s extraordinary growth, you generally want to avoid investing in SOEs. Most have been—and will continue to be—lousy investments.

I’ll put it bluntly:

State Owned Enterprises Are Rat Holes!

China’s system of bribes and back-scratching is half voluntary, half coercive and entirely at the expense of U.S. investors. There is no accountability and absolutely no way you can tell what’s going on.

Example: China Aviation Oil covered up huge losses on an energy short trade last year—by simply issuing more stock!

But, tragically, SOEs are the way most outsiders are participating in The China Miracle. These corrupt organizations have sucked an incredible $70 billion out of the West, and the pace is picking up.

Most State Owned Enterprises (SOEs) are socialist entitlement programs dressed as capitalist ventures. There’s simply NO accountability.

Example: China Petroleum used to make toothpaste—just to keep workers employed. And several railroad SOEs have joined in the office building craze.

Very often Wall Street analysts know nothing—or at least say nothing—about what goes on in SOEs. After all, they look like blue chips to the unaware! That’s why most of U.S. investors’ money, poured into SOEs in the last 5 years, may never become profitable.

Imagine the duplicity of Enron married to the bureaucratic mess of Fannie Mae. Would you put your money in such an enterprise?

My research shows that at least half of them will not survive the next decade in their present form. In fact, the portion of the Chinese economy controlled by the state and the SOEs has already decreased from 90% to 50% during the past 15 years.

But SOEs Are Not
The Whole Story

The real opportunities are not government-backed at all. These enterprises spring on to the scene like small tornadoes. The ones that survive have an ability to adapt that is so amazing, it makes even my head spin.

The real millionaire entrepreneurs I meet today in China may be 35 and on their fourth failure—and rapidly moving towards their fifth success. They don’t flaunt their money and they have what I can best describe as…American mid-West values!

These are determined, rigorous leaders who despise the SOE bosses and run rings around them.

Example: a friend of mine, with a nice home in Beverley Hills, returns to his old hometown of Beijing to create high-end software for construction companies. He made an overnight fortune—at age 70!

But above all, these entrepreneurs are what you might call “clock-builders,” not “clock-watchers.” In other words, they set the pace, do the building, possess the vision. If you were fortunate enough to be part of that tremendous release of inventive energy that the U.S. experienced after World War II, you know exactly what I’m talking about.

And it is with these entrepreneurs that U.S. investors can make stunning fortunes.

Beyond The
“China Miracle” Hype

My name is Robert Hsu (sounds like Sue) and I made my first fortune on Wall Street as a global hedge fund manager for Goldman Sachs.

But I’m making my second fortune in China, where a massive economic monster is stirring. And I am helping my American friends do the same, through my new advisory, China Strategy.

I've just released the current Issue of China Strategy and I would be honored to send it to you. Click here now to learn more about China investing through my China Strategy service.

The great shift of wealth that is underway in China is creating 1 billion new capitalists. But as with any extraordinary shift, great dangers accompany great opportunities.

That’s why I launched China Strategy now. The advice most investors are receiving is wrong. And the best opportunities are being missed.

Why is this?

Local knowledge makes the difference

Lots of pundits go to Pudong, stay in the Grand Hyatt, attend some meetings and go home “experts.”

But at street level we notice things that often escape the attention of Westerners in wingtips.

We notice, for example, that gasoline is selling at $1.90 a gallon. That price is government-subsidized and Chinese-owned oil companies are losing money on every gallon sold. So imported supplies are curtailed and gas stations run out of gas. So while a Wall Streeter recommends China Petrochemical, we stay clear.

But we also notice that there’s a 25-minute wait outside the local Pizza Hut. A company called Yum Brands could be a much better investment.

Our goal with China Strategy is always to find stocks riding the China Miracle to a double in the next year. There’s nothing out there like it. Sign up for China Strategy now to receive my current issue and I’ll also send you a copy of my latest research report. Get Robert Hsu’s latest research report “5 Ways to Cash in on the China Miracle Now” for free with your subscription to China Strategy.

WARNING: Avoid Stocks Listed in Mainland China

The past three years for investors in Chinese stocks have been, to paraphrase Charles Dickens, both the best of times and the worst of times.

For investors in Chinese companies listed in Hong Kong, the past three years have been great. The Hang Seng H Share Index—which consists of 40 Mainland Chinese companies listed on the Hong Kong Stock Exchange—was up a phenomenal 170% from 2003 to 2005, more than four times the S&P 500 in the same period. On the other hand, Chinese companies (mostly SOEs) listed in the Mainland Shanghai and Shenzhen exchanges were down about 30% during the same period.

Given China’s red-hot economy, it’s not surprising that H shares in Hong Kong have been so strong. But what happened to the stocks that trade in Mainland China itself?

There are three main reasons behind their poor performance, and understanding these reasons will put you ahead of most other investors trying to profit from the China Miracle.

Reason #1: High Valuation. Stocks trading in Mainland China sported a bubbly average P/E ratio of 56 at their peak back in 2000—that is if you believe the earnings numbers. By comparison, the S&P 500 is now trading at 16 times trailing 12-month earnings, or less than one-third the valuation of Mainland stocks at their peak.

At the other extreme, H share Mainland companies listed in Hong Kong were dirt cheap at the beginning of 2003, trading at an average P/E of less than 10. With H shares trading at an 80% discount to their Mainland counterparts, it’s not hard to figure out which was the better buy.

Reason #2: Too Many Stocks Available. As SOEs became increasingly privatized, the state sold massive blocks of shares into the market, which depressed prices. Currently, the government owns approximately two-thirds of all the shares in companies listed on the Shanghai and Shenzhen exchanges, so this will continue to be a huge problem. The Chinese government is starting a series of reforms to alleviate the supply surplus, but it is too early yet to see any results.

Reason #3: Poor-Quality Companies. The third reason behind China’s stock market decline is the poor quality of companies listed in the Mainland Chinese exchanges. China’s top publicly traded companies are listed in Hong Kong and New York. Many of the companies listed in Shanghai and Shenzhen are unable to meet the more rigorous accounting and corporate governance standards required on the Hong Kong and New York exchanges.

Corporate fraud on the order of Enron and WorldCom are common in companies listed in Mainland China. This pervasive corruption and fraud has eroded Chinese investor confidence, further contributing to China’s stock market decline.

None of these three issues will be resolved anytime soon, so you want to stay away from companies traded on the Shanghai and Shenzhen exchanges.

The best Chinese stocks are those listed on exchanges outside of Mainland China.

I’m begging you not to invest in China unless you have “boots-on-the-ground” experts who know what’s really going on.

The so-called China Miracle you keep hearing about in the mass media is a setup: ordinary investors are taking the bait and swallowing the lie.

I don’t want you to be one of them.

I would be honored to send you the current issue of my new advisory, China Strategy. Receive immediate online access to a free copy of Robert Hsu’s research report “5 Ways to Cash in on The China Miracle Now”, by clicking here now.

Avoid These Chinese Companies Traded in America

The following stocks are Chinese companies traded on American exchanges. But just because they are based in China doesn’t mean they are smart investments in the growth taking place there. The companies listed below are vulnerable to a variety of factors, from poor management to market forces to government interference.

Let me say that my list here does not include stocks trading under $10 a share. Those companies are likely to have poor fundamentals that are already reflected in their low share prices, and many have already been branded as losers. Instead, I wanted to focus on bigger companies that you may have been tempted to invest in:

American Companies That Are NOT China Plays

In the desire to profit from China’s growth, there’s a rush to proclaim any American company with a presence in China as a “China play.” That is often a mistake.

For example, you hear stories about Wal-Marts opening in China, drawing 100,000 people on their first day of business and setting sales records. The numbers are eye-popping, and they are emblematic of China’s growth and the emerging middle class. They do not mean Wal-Mart is a good China investment. Why? Because Wal-Mart is so big that sales from China have virtually no impact on the bottom line. That’s a distinction you have to make when analyzing a multinational company’s potential in China.

Which brings up a question that my American friends often find a little disturbing: What, exactly, is YOUR China investment strategy?

Because, if I was to look inside your portfolio, the stocks you hold—yes and the bonds and even the real estate—would imply a very clear China Strategy.

Our goal at my China Strategy is twofold: one, uncovering stocks riding the China Miracle to a double in the next year.

The second is to steer you clear of China stocks that are vulnerable to China’s rise.

Here, then, are some of the companies that you might hear wrongly hyped as China plays:

There you have it—specific China stocks to avoid as well as some general guidelines to help you sidestep some of the profit-busting landmines. If you own any of the Chinese stocks mentioned in this report, my advice is to sell them right now. If you own any of the American companies on the list, make sure it’s for reasons other than their involvement in China.

Are You Ready?

My mission in life is to help citizens of my adopted country, America, understand and profit from the return of China to the status of a great civilization.

Now I want to help you profit. Accept a risk-free trial to China Strategy to learn exactly which China investing opportunities you should take advantage of today.

Sometimes that opportunity leads us back to a familiar Western stock like Phelps Dodge or Yum Brands. Sometimes our Strategy will lead you deep inland, to a local online auctioneer that’s beating eBay at its own game.

But our goal is always to find stocks riding the China Miracle to a double in the next year.

There’s nothing out there like my China Strategy. Sign up now to receive the current issue of China Strategy and get my latest research report “5 Ways to Cash in on the China Miracle Now” for FREE.

Discover:

* What ONE China Internet stock you should own in the second half of 2006.

* Which China online content-provider could double in the second half of 2006.

* The ground-breaking cell-phone provider that’s taking China by storm.

* The global semiconductor company that’s now deriving 45% of its revenue from China—more than any other company in the S&P 500.

* Apple, eBay, Skype, Google—how their China Strategy could impact stock prices in the second half of 2006.

* Find out everything you need to know about China investing with a subscription to China Strategy.

If you agree that the shift of wealth in China, creating 1 billion new capitalists, is the most significant investment opportunity of our lifetimes, then I urge you to join me today.

The charter issue of China Strategy tells you much about the dangers of the most popular China investments and gives you a real street-level look at several ten-bagger opportunities. Get my newest investing research report, “5 Ways to Cash in on the China Miracle Now” for free when you accept this no-risk invitation to try China Strategy.

Sign up for China Strategy right now to learn about all the miracle profits you can make by investing in China today.

Robert Hsu
Editor, China Strategy

P.S. I made my first fortune on Wall Street. But I plan to make my second fortune from the rise of the next great superpower: China. And I am helping my American friends do the same, through my new advisory, China Strategy. I would be honored to be your guide to your China fortune. Click here to accept this 100% risk-free trial. You’ll get my current Issue hot off the presses PLUS my brand-new research report "5 Ways to Cash in on the China Miracle Now." Subscribe today.