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China Stock Market Boom

Written By Brian Hicks

Posted October 16, 2007

China now has the fourth-largest market cap in the world. The Shanghai, Shenzhen, and Hong Kong exchanges are all beating the pants off of Wall Street. But this week’s Communist Party Congress tells me there’s plenty of room to grow.

Who would have thought twenty years ago that we would be looking to any Marxist body for bullish indicators on the world’s most impressive economy? Well, it’s a new century and China’s economy is bursting forth at 11% growth per year. If you’re not in on it, you’re leaving heaps of money on the table.

But it’s not too late to follow this waking dragon to prosperity.

President Hu Jintao announced three major goals at the five-yearly congress:

  • Quadruple China’s per capita GDP by 2020 from 2000 levels.

  • Reduce resource consumption and ramp up environmental protection.

  • List the stocks of up to 50 state-owned enterprises for public trading.

Blue Chips and Poker Chips

I’ve read loads of analyst coverage and reports on China’s basic industrial economy, that is, the stuff that propels any country into a true developed-nation standing: energy, raw materials, aluminum, etc.

After all, this Monday PetroChina achieved the status of world’s second-largest company, as its share price jumped by 13% and pushed the state-owned oil company’s market cap to $434 billion, past General Electric’s measly $420 billion total. Given another year or so, we could see PetroChina eclipse Exxon Mobil (NYSE:XOM), with its $518 billion paper value.

Here we see NYSE:PTR, PetroChina’s American Depositary Receipts, relative to Hong Kong’s Hang Seng benchmark in red and the modest Dow in green:


Now, Exxon Mobil has a dividend yield of 1.50%, and PetroChina’s is 2.50%. At what point does PTR become a boring old blue chip? Maybe when oil prices cool down, or China’s stock markets slow to a relative crawl.

Neither of those prospects is very imminent.

What is certain in the near-term is China’s commitment to unleash dozens more companies like PetroChina onto equity markets. Believe it or not, the Chinese stock bubble many have been talking about for over a year hasn’t got half of the air it could.

It’s not just the Cantonese dialect that separates Hong Kong from Beijing. After the handover from British to Chinese control late in the 20th century, Hong Kong and neighboring Macau have remained relatively isolated in economic terms from the rest of China. Chinese nationals need special permits to get to the two Special Autonomous Regions (SARs, not to be confused with the killer disease SARS), and foreigners like me can’t simply traipse back and forth between there and nearby Shenzhen, where China’s second stock exchange is located, without getting a new visa.

In the past year, Macau surpassed Las Vegas to become the world’s gambling capital. Much of the money that fueled that casino coup came from the mainland, especially neighboring Guangdong. So China introduced additional measures to stem the tide flowing to Macau’s poker tables, knowing that gambling is illegal on the mainland and that the country’s 40% household savings rate could come down as quickly as the roulette wheel turns.

But this August, China’s version of the SEC announced that a limited number of Chinese citizens would be allowed to invest in the Hong Kong Stock Exchange, which is considered to be a foreign market. Is this just a different kind of gambling for China’s nouveau-riche?

With Chinese maids and factory workers opening hundreds of thousands of new trading accounts each day, the implications for the Hong Kong exchange are huge.

No wonder the Hang Seng went stratospheric from mid-August on, adding almost half of its total value on the upside of the international sub-prime pullback (they can thank Uncle Sam and our wily credit habits for that retreat).

Bringing Hong Kong to You

If you’re looking for a direct Hong Kong play, try the iShares MSCI Hong Kong ETF, which trades as EWH on the NYSE. It has tracked the Hang Seng well, as we see here:

Hong Kong Index

But an index-tracking ETF is, by nature, only supposed to be on pace with the index itself. Even when you get performance as stellar as Hong Kong’s late-summer rally, you may still be missing out on major single-stock opportunities.

That’s why I’m heading to Hong Kong in November, as part of my 16-day research junket to Japan, Korea, and China (along with HK and Macau). I’ll be meeting with key companies in all of these, but I am most excited about one play that has already delivered my Orbus Investor subscribers some big-league international returns.

It’s got the potential to double over the next year, profiting from its position as THE firm used by the Chinese government to prepare the mainland to enter the global consumer credit card market.

Think about this: In Hong Kong, 30% to 40% of all payments are conducted without cash.

During the month I spent in western China in 2005, I didn’t use a credit card once.

That’s because only 3% of all transactions in China are done without cash. In Russia, another in the emerging market pantheon? Just 6%.

It’s a major hindrance to China’s domestic consumption, and you can bet that when President Hu Jintao talked this week about "optimizing the economic structure," he was thinking of market sophistication at all levels.

I’ll be meeting with this company’s chief of Asian operations in person in Hong Kong, and I want you to be there with me. Reports from the field, sights and sounds through the magic of the internet, and the most profitable information you’ll find in any international market analysis-that’s what I promise.

To learn more and join Orbus Investor risk-free, click here:



Sam Hopkins

P.S. – China isn’t the only place where growth is roaring along at an unprecedented pace: Orbus Investor is up 148% in Libya’s oil renaissance. . . 101% in European infrastructure. . . and 137% in Chinese communications! Go global now!