Dear Fellow Investor,
The markets in Mainland China have been gathering a lot of media attention over the past two weeks. They've been up, they've been down, and they've been splashed all over the news. With everything that's been happening, I thought it would be a good idea in this week's Dispatch to take a look at what's really going on.
Greenspan Can't Stop China's Rally
The attention on China's markets intensified last week after Alan Greenspan said he believes the Chinese rally is unsustainable. In a satellite conference with Madrid, the former Fed Chairman said that "there is going to be a dramatic contraction at some point."
After Greenspan's comments, most global markets sold off by about 1% -- except for the indices in Mainland China, which climbed 3% over the next several days. Naturally, everybody rushed to blame China's stock market mania for the international sell-off.
I respect Greenspan, and I think he did a pretty good job as Reserve Chairman, but his track record as a stock market prognosticator is lousy. As you know, back in late 1996, he coined the famous phrase "irrational exuberance," which he used to describe the state of the U.S. market at the time.
On the day Greenspan made that comment, stocks sold off sharply. But smart investors who bought shares on that dip doubled their money over the next three years. On December 5, 1996 -- the day that Greenspan coined the phrase -- the S&P 500 stood at 744. By March 24, 2000, the S&P had climbed to a record close of 1,527. The index never re-tested that low level of 744, even in the bear market that followed.
It's important to note that after Greenspan made his pessimistic prediction about China, the markets there didn't falter. As I've told my China Strategy readers, there is simply too much money sloshing around in China, and the people there have few investment options. The Chinese, on average, save a whopping 35% of their income. Given that China's after-tax bank interest rates are below the rate of inflation, Chinese investors have little choice but to put their money into stocks in order to earn good returns.
China's Hiccup Just Healthy Consolidation
Then, two days ago, the Chinese markets sold off 6.8%. The drop happened after the government announced it was tripling the trading tax (or "stamp" tax) from 0.1% to 0.3% per stock trade. The tax increase was a move to cool off the booming Chinese market, which is up 50% so far this year.
Unlike here in America, where we pay capital gains taxes on our trading profits, China has no such gains taxes. Instead, the Chinese government gets stock market tax revenues from a stamp tax that it charges investors on each trade.
This stamp tax was first enacted in October 1991 at 0.3% per trade. Over the next decade, the tax fluctuated between 0.2% and 0.5% per transaction. During January 2005, in the midst of a major bear market in Mainland Chinese stocks, the stamp tax was lowered from 0.2% to 0.1%. Now that market mania has gripped China, the government decided to increase the transaction tax to 0.3% again in order to discourage short-term speculation.
Over the short- to medium-term, raising the stamp tax will drain some excess liquidity from China's market. Taking into account the current trading volume in China, the increased tax should remove between $130 million–$180 million each day from the Chinese indices. It's clear that this can add up to big numbers over a few months.
But over the long haul, Chinese investors will probably shift their trading practices to cope with the new policy. Almost 20 years ago, during the great Taiwanese bull market of the late 1980s, the Taipei government did the same thing to curb excessive stock market speculation. The Taiwan market sold off initially, but soon consolidated and made new highs as investors shifted their focus to the long-term.
I believe the Mainland Chinese stock market will recover from this hiccup very soon and make new highs again. As we just talked about, Chinese investors have very few opportunities to earn good returns on the $3 trillion they've saved up in their banking system. This situation will not change anytime soon, so I expect the Chinese market to climb higher in the coming months. To learn how you can profit from the Mainland market's climb, click here to join us at China Strategy today.
Growth Will Continue
But no matter what the markets do in Mainland China, the country's economy will remain strong. China's economy shows little correlation with its stock market. For instance, in 2004 and 2005 -- two dismal years for China's stock market -- the economy still grew at a blistering pace of 10% each year.
China's market is still developing and represents a small part of the country's overall assets. Any dips in Mainland stocks won't affect the incredible growth that's taking place in China right now. As you well know, the Chinese exchanges experienced a painful pullback of 9% on February 27, but that didn't stop the growth rate -- the government announced that China's economy grew more than 11% during the first quarter.
You may have noticed that while the market in Mainland China sold off two days ago, stocks here in the U.S. did very well yesterday. In fact, the S&P 500 closed at its first record high in more than seven years, and the Dow reached a new high as well.
Stocks in my China Strategy service stayed strong and didn't succumb to the pullback that China experienced. So why did my China Strategy stocks stay the course amidst all the selling in China? As I've told my readers many times, the Mainland Chinese stock market is closed to foreigners. As a result, it has the lowest statistical correlation with the U.S. stock market amongst major international bourses.
It's not uncommon to see a stock with dual listings go up in Shanghai and move down in Hong Kong, or vice versa, on the same day. Stocks trading in Mainland China are selling on average at twice the valuation of shares trading in Hong Kong and New York. China's currency control and lack of effective short-selling mechanisms prevents arbitrage from taking place. So it makes little sense why a rally or sell-off in Shanghai should impact stock markets from New York to London.
Three Stocks to Buy Now
So far, my China Strategy subscribers have done quite well in profiting from China's economic growth. A couple of our holdings are up over 100%, and many others are up 50% or more! This performance is one of the reasons why I believe that the very best company to invest in is not a new one -- for the best stocks to buy right now, we don't need to look any further than our current China Strategy portfolio.
In fact, I think there are three companies in particular that are in excellent position to deliver superior profits:
* Our oil refiner (up 57% for us so far)
* Our medical devices company (up 71%)
* Our innovative gaming play (up 94%!)
As the largest oil refinery in Asia, our refiner will do especially well as demand for gas kicks into high gear during the upcoming summer travel season. And China's largest medical instrument company just reported blowout earnings two weeks ago, and its business is growing more than 50%, with the U.S. now its fastest-growing market. And lastly, a U.S. gaming industry giant just purchased a stake in our gaming play, further cementing this company's position as the operator of choice in China for international game developers.
For more information about how to profit from these companies, click here. You'll also get instant access to my entire China Strategy portfolio!
Until next week,
Robert Hsu
Editor, China Strategy
P.S. One of the securities in my China Strategy portfolio is a special fund that's tied directly to Mainland China's market! As share prices in China reach new highs, this fund will climb right along with the overall market. Click here to get immediate details on this recommendation.
The markets in Mainland China have been gathering a lot of media attention over the past two weeks. They've been up, they've been down, and they've been splashed all over the news. With everything that's been happening, I thought it would be a good idea in this week's Dispatch to take a look at what's really going on.
Greenspan Can't Stop China's Rally
The attention on China's markets intensified last week after Alan Greenspan said he believes the Chinese rally is unsustainable. In a satellite conference with Madrid, the former Fed Chairman said that "there is going to be a dramatic contraction at some point."
After Greenspan's comments, most global markets sold off by about 1% -- except for the indices in Mainland China, which climbed 3% over the next several days. Naturally, everybody rushed to blame China's stock market mania for the international sell-off.
I respect Greenspan, and I think he did a pretty good job as Reserve Chairman, but his track record as a stock market prognosticator is lousy. As you know, back in late 1996, he coined the famous phrase "irrational exuberance," which he used to describe the state of the U.S. market at the time.
On the day Greenspan made that comment, stocks sold off sharply. But smart investors who bought shares on that dip doubled their money over the next three years. On December 5, 1996 -- the day that Greenspan coined the phrase -- the S&P 500 stood at 744. By March 24, 2000, the S&P had climbed to a record close of 1,527. The index never re-tested that low level of 744, even in the bear market that followed.
It's important to note that after Greenspan made his pessimistic prediction about China, the markets there didn't falter. As I've told my China Strategy readers, there is simply too much money sloshing around in China, and the people there have few investment options. The Chinese, on average, save a whopping 35% of their income. Given that China's after-tax bank interest rates are below the rate of inflation, Chinese investors have little choice but to put their money into stocks in order to earn good returns.
China's Hiccup Just Healthy Consolidation
Then, two days ago, the Chinese markets sold off 6.8%. The drop happened after the government announced it was tripling the trading tax (or "stamp" tax) from 0.1% to 0.3% per stock trade. The tax increase was a move to cool off the booming Chinese market, which is up 50% so far this year.
Unlike here in America, where we pay capital gains taxes on our trading profits, China has no such gains taxes. Instead, the Chinese government gets stock market tax revenues from a stamp tax that it charges investors on each trade.
This stamp tax was first enacted in October 1991 at 0.3% per trade. Over the next decade, the tax fluctuated between 0.2% and 0.5% per transaction. During January 2005, in the midst of a major bear market in Mainland Chinese stocks, the stamp tax was lowered from 0.2% to 0.1%. Now that market mania has gripped China, the government decided to increase the transaction tax to 0.3% again in order to discourage short-term speculation.
Over the short- to medium-term, raising the stamp tax will drain some excess liquidity from China's market. Taking into account the current trading volume in China, the increased tax should remove between $130 million–$180 million each day from the Chinese indices. It's clear that this can add up to big numbers over a few months.
But over the long haul, Chinese investors will probably shift their trading practices to cope with the new policy. Almost 20 years ago, during the great Taiwanese bull market of the late 1980s, the Taipei government did the same thing to curb excessive stock market speculation. The Taiwan market sold off initially, but soon consolidated and made new highs as investors shifted their focus to the long-term.
I believe the Mainland Chinese stock market will recover from this hiccup very soon and make new highs again. As we just talked about, Chinese investors have very few opportunities to earn good returns on the $3 trillion they've saved up in their banking system. This situation will not change anytime soon, so I expect the Chinese market to climb higher in the coming months. To learn how you can profit from the Mainland market's climb, click here to join us at China Strategy today.
Growth Will Continue
But no matter what the markets do in Mainland China, the country's economy will remain strong. China's economy shows little correlation with its stock market. For instance, in 2004 and 2005 -- two dismal years for China's stock market -- the economy still grew at a blistering pace of 10% each year.
China's market is still developing and represents a small part of the country's overall assets. Any dips in Mainland stocks won't affect the incredible growth that's taking place in China right now. As you well know, the Chinese exchanges experienced a painful pullback of 9% on February 27, but that didn't stop the growth rate -- the government announced that China's economy grew more than 11% during the first quarter.
You may have noticed that while the market in Mainland China sold off two days ago, stocks here in the U.S. did very well yesterday. In fact, the S&P 500 closed at its first record high in more than seven years, and the Dow reached a new high as well.
Stocks in my China Strategy service stayed strong and didn't succumb to the pullback that China experienced. So why did my China Strategy stocks stay the course amidst all the selling in China? As I've told my readers many times, the Mainland Chinese stock market is closed to foreigners. As a result, it has the lowest statistical correlation with the U.S. stock market amongst major international bourses.
It's not uncommon to see a stock with dual listings go up in Shanghai and move down in Hong Kong, or vice versa, on the same day. Stocks trading in Mainland China are selling on average at twice the valuation of shares trading in Hong Kong and New York. China's currency control and lack of effective short-selling mechanisms prevents arbitrage from taking place. So it makes little sense why a rally or sell-off in Shanghai should impact stock markets from New York to London.
Three Stocks to Buy Now
So far, my China Strategy subscribers have done quite well in profiting from China's economic growth. A couple of our holdings are up over 100%, and many others are up 50% or more! This performance is one of the reasons why I believe that the very best company to invest in is not a new one -- for the best stocks to buy right now, we don't need to look any further than our current China Strategy portfolio.
In fact, I think there are three companies in particular that are in excellent position to deliver superior profits:
* Our oil refiner (up 57% for us so far)
* Our medical devices company (up 71%)
* Our innovative gaming play (up 94%!)
As the largest oil refinery in Asia, our refiner will do especially well as demand for gas kicks into high gear during the upcoming summer travel season. And China's largest medical instrument company just reported blowout earnings two weeks ago, and its business is growing more than 50%, with the U.S. now its fastest-growing market. And lastly, a U.S. gaming industry giant just purchased a stake in our gaming play, further cementing this company's position as the operator of choice in China for international game developers.
For more information about how to profit from these companies, click here. You'll also get instant access to my entire China Strategy portfolio!
Until next week,
Robert Hsu
Editor, China Strategy
P.S. One of the securities in my China Strategy portfolio is a special fund that's tied directly to Mainland China's market! As share prices in China reach new highs, this fund will climb right along with the overall market. Click here to get immediate details on this recommendation.
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