Chinese stocks ripped higher again this week...
And True Wealth subscribers are making even larger profits. Editor Steve Sjuggerud has been bullish on China since September.
For a good summary of his bullish thesis, you can read
this DailyWealth essay. In short, China was cheap and the government was easing to boost the stock market and encouraging individuals to participate.
The Shanghai Stock Exchange hit a fresh seven-year high earlier this week on speculation that the Chinese government would begin consolidating its state-owned enterprises – like oil giants PetroChina and China Petroleum & Chemical Corp ("Sinopec"), whose shares both rose 10%. (The Shanghai Stock Exchange limits stocks from rising or falling more than 10% in a single session.)
The Economic Information Daily, a Chinese newspaper, reported that the regulator of China's state assets may cut the number of state-owned enterprises from 112 to 40, though no companies were specifically mentioned.
The Chinese market got a further boost on rumors that the People's Bank of China ("PBOC"), the country's central bank, would make direct purchases of government debt.
Coincidentally, Steve Sjuggerud wrote about China in
Monday's DailyWealth. He cited our friend, Peter Churchouse, who is a 30-year veteran of investing in the Asian markets. Peter previously served as the head of research for Morgan Stanley in Asia. He recently told his subscribers, "Six months from now, China's market could double. Or it could be down 50%."
Chinese stocks are already up 100%, but they still aren't expensive, trading at a forward price-to-earnings ratio of 15. Still, we've seen a massive influx of individual investors into the mainland Chinese market. As Peter wrote in a recent note to his subscribers...
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Mainland China is still the Wild West when it comes to equity markets. This may not be a valuation bubble, but it's clearly a speculative bubble driven primarily by massive retail market turnover with an appetite for a quick buck.
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Take a look at this chart of the number of Chinese brokerage accounts being added every week back to 2007...
Steve concluded...
More than 3 million new brokerage accounts were opened in China just last week. That should ring some alarm bells...
New Chinese brokerage accounts are opening up at the fastest rate in history. Today's rate is even faster than during China's last stock market bubble in 2007. This doesn't mean Chinese stocks have to crash today or tomorrow... or anytime soon, even. But what it shows is [that] local Chinese stocks are likely in a speculative bubble.
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Steve is still long China. In particular, he likes H-shares listed in Hong Kong. In many cases, shares of the same companies trade both in Shanghai and Hong Kong. But they're much cheaper in Hong Kong right now. Steve calls it "
the biggest anomaly in finance today."
But we think China has larger plans than just boosting its stock market...
It's no secret that China has been challenging the U.S. for dominance in the global economic landscape. The country is buying U.S. real estate, businesses, stockpiling Treasurys... and, according to Bloomberg, it could be buying huge amounts of gold to back its currency (the yuan). And that could mean China will challenge the U.S. dollar's status as the world's reserve currency. From Bloomberg...
China became the world's second-largest economy in 2010 and has stepped up efforts to make the yuan a viable competitor to the dollar. That's led to speculation the government has stockpiled gold as part of a plan to diversify $3.7 trillion in foreign-exchange reserves.
The People's Bank of China may have tripled holdings of bullion since it last updated them in April 2009, to 3,510 metric tons, says Bloomberg Intelligence, based on trade data, domestic output and China Gold Association figures. A stockpile that big would be second only to the 8,133.5 tons in the U.S.
"If you want to set yourself up as a reserve currency, you may want to have assets on your balance sheet other than other fiat currencies," Bart Melek, head of commodity strategy at TD Securities, said by phone from Toronto. Gold is "certainly viewed as a viable store of value for an up-and-coming global power," he said.
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China is pushing to add the yuan to the International Monetary Fund's (IMF) currency basket, known as the "Special Drawing Right." It currently includes only the U.S. dollar, euro, yen, and British pound. This would greatly increase the amount of yuan used in global trade. The IMF will meet in October to discuss the possibility.
And news service Reuters recently cited inside sources saying China was taking other steps to increase yuan convertibility. From Reuters...
Under the pilot scheme, firms in the Shanghai free trade zone (FTZ) can move the yuan and other foreign currencies in and out of China for capital account transactions. That lets them raise money overseas and bring the funds back to China for real investment – a practice that is otherwise banned in China.
In coming months, firms in China's other FTZs – in Tianjin, Fujian, and Guangdong – will be granted the same right, the sources said, though one said the roll-out would be staggered due to concerns over rising capital outflows.
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"Once this is done, this will be a big step forward in opening China's capital account," one of Reuters' sources said. Every analyst Reuters contacted said the message was clear: China is trying to increase yuan convertibility and make its currency a major player in global finance.
Steve has actually prepared an entire report about China's plans for the yuan... and why a major announcement in October could shift the global economic landscape in China's favor.
If you're on the right side of this shift, you can make huge profits. Whether you own stocks and bonds or just hold a savings account at your local bank, if Steve's thesis is correct, this will have massive implications for every American.