China is Changing ….

When is the Question!!!

By

Mike Casson, Executive Director

Anita Mills, Executive Editor

This we know …. China is rebalancing its economy and cooling off, down from its soaring 10-11% annual economic growth. The controlled slowdown in their export-driven economy is expected to lead to an estimated 7.5-7.9 percent GDP.  Right now, most fixed asset investment growth comes from government spending, while weakening demand is worsening the overcapacity problems and firms are forced to cut back production.  Ok … no revelation there, but keep reading.

According to Li Zuojun, deputy director at the Development Research Center of the State Council (DRC), China faces several major challenges as the economic climate changes.

Among these challenges is a restructuring to shift from external demand to domestic demand, from investment driven growth to consumer-led growth, and a shift from government investment to private investment.

Industrial overproduction must be constrained and technologies upgraded along with skill levels of management and workers.  Energy conservation is at the forefront, as demand for energy and raw materials increases. Yet the government has set goals of reducing carbon dioxide emissions, development of renewal energy sources and environmental protection. These could be a throttle for the near term.

Now, here’s where it gets interesting …

China is looking at a change in leadership, with nearly all of the highest-ranking policymakers replaced at the National Party Congress of the Chinese Communist Party later this year.  President Hu Jintao, who has served two five-year terms, and Premier Wen Jinbao as well as Chairman of the National People’s Congress Wu Bangguo, are all expected to retire.

The last two transitions were marked by accelerating investment growth immediately before and after the change. And we expect policymakers at the macro level will want to ensure that the transition happens during a time of economic strength or at least stability. And indeed, China is expected to stabilize in the fourth quarter, which bodes well for healthier development going forward.

These new leaders may have different priorities and views, but there is little forewarning of their plans as any differences from current policymakers could chill any hope of leadership advancement.  Politics prevails going into the transition, and secrecy surrounds China’s leadership as well as the date of the gathering where the next generation of policymakers will be appointed.

The China Club has brought some outstanding investment opportunities to our members since 2003.  We pride ourselves on being able to discover high growth, quality companies in the China space.  But sometimes it’s just best to sit out and watch.  The markets are in a quandary, speculating what will happen in Europe, while some say China will come riding to the rescue and others say not.  A number of China companies have already gone private and left the US exchanges, and others are expected to.

That said, we still have our ear to the ground for good investment opportunities, but discovering them as well as researching them is increasingly challenging. We’ll have more to report in the coming weeks, so check back often.

In the meantime, you might want to take a look at the MicroCap MarketPlace website (www.microcapmarketplace.com ) where you’ll find information on micro- and small-cap companies in many different sectors.