Chinease Communist Party - with over $1 trillion to Invest

By: Money_and_Markets

If you watched much CNBC last week, you might have thought it turned into the “Ben Bernanke channel.” That's because the cameras were fixed on the Federal Reserve Bank Chairman's two-day testimony to Congress.

Given this kind of superstar treatment, it's no wonder most investors consider Bernanke to be one of the most powerful financial people in the world. Don't get me wrong, Bernanke, as well as people like Warren Buffett and Bill Gates, are definitely forces to be reckoned with. But there are also big fish across the pond.

Today, I want to tell you about two other investors that top my “world's most powerful” list. I'll also tell you what they're likely to be buying, and how your own portfolio can benefit …

Guo Shuqing and Lou Jiwei: The Biggest Investors You've Never Heard Of!

These two senior officials of the Chinese Communist Party look like the men who will head up two new offices that will handle China's $1.1 trillion dollars of foreign exchange reserves.

Guo Shuqing is the chairman of China Construction Bank, the third-largest bank in the country, and is likely to lead the new state-owned investment company. Lou Jiwei, Vice-Minister of Finance, will run a separate office called the State Foreign Exchange Investment Company.

Here's the important part: These two new Chinese offices will probably be modeled after the system that's currently being used by Singapore. That country's government owns and operates two investment companies called Temasek Holdings and Government Investment Corporation (GIC).

Temasek Holdings is the Singapore government's investment arm, and is 100% owned by the Ministry of Finance. Established in 1974, it runs a diversified global portfolio worth $129 billion.

Temasek has partial or full ownership of lots of Singapore-based companies such as Singapore Airlines, Singapore Telecommunications, and Neptune Orient Lines. It also has significant stakes in foreign companies like ICICI Bank (India), China COSCO Holdings (China), Bank Danamon (Indonesia), and Quintiles Transnational Corp. (USA).

The company is so rock solid that both Moody's and Standard & Poor's have assigned it their highest credit ratings (Aaa and AAA, respectively). And since its inception 31 years ago, Temasek has delivered a compounded annual total return of 18%!

With results like that, you can understand why China is eager to emulate Singapore's model.

Where I Think China Will Invest Its $1 Trillion …

Right now, China has hundreds of billions of dollars in low-yielding U.S. Treasury bonds. And you can bet that the country wants to put some of this money to work in more exciting investments.

Not only does China want to increase its returns, it's also very concerned that a falling dollar could wipe out the paltry returns it is receiving … and possibly even result in all-out losses.

The country has been tight-lipped about its specific investment plans, but here are four areas that I think Shuqing and Jiwei will be targeting:

$19 (34% discount)

Natural Resources: China desperately needs natural resources to fuel its breakneck growth. So I expect the country to take significant stakes in coal, oil, copper, natural gas, steel, uranium, and other natural resource companies. It may even consider making outright purchases. Remember, CNOOC already tried to buy Chevron in the recent past.

Gold: Asians and Americans have very different views when it comes to gold. In the U.S., gold is an insurance policy against inflation and currency devaluation or a vehicle for speculation. In Asia, however, gold is used as a basic savings account … the way we use passbook savings and money market accounts. Because of this worldview, I expect China to convert a large part of its reserves out of paper assets (like bonds) and into gold.

Real Estate: Asians love real estate almost as much as they love gold. And if China pays any attention to Temasek's successful investment model, they'll invest heavily in real estate and construction companies.

Problem-solving Companies: The Communist Party often invests for social reasons as well as monetary ones. For that reason, I expect China to invest more aggressively in companies that can help solve many of the country's social ills. I'm talking about companies that focus on issues like air and water pollution, transportation, and health care.

What China's Investments Mean For Your Portfolio

Now that I've told you what areas I think China will be investing in, the next step is to connect the country's shopping list to the investments most directly poised to profit ...

First, metals should stay hot — gold, silver, and uranium stocks are likely to keep going higher. I'm not a metals expert like Larry or Sean, but I think the gains are going to keep coming for many of these investments.

Second, other natural resources are likely to ride the same wave. Many commodities — oil, wheat, natural gas, soybeans, etc. — look poised to go higher. As I've said before, the simple rule is, “Buy whatever China is buying.”

Third, foreign investors are holding a ton of U.S. Treasury bonds, and all that buying has kept U.S. interest rates low. But if a country like China reduces its stake in our bonds, interest rates could move up. If you're holding bonds, I'd stick to shorter-term maturities right now.

Fourth, if I could only make one single investment bet, it would be Asian stocks. I'm talking about the kind of companies I just told you China itself is likely to buy, as well as other undiscovered gems.

After all, many Asian economies are still posting phenomenal growth. Plus, the U.S. dollar looks like it's going to keep falling. That makes this a great time to add some non-dollar-denominated assets to your portfolio. Subscribers to my Asia Stock Alert service are doing exactly that … and making a bundle in the process.

Bottom line: Don't make the mistake of ignoring what happens across the Pacific Ocean. China is a 600-pound tiger tearing through the financial markets, and ignoring its next move could prove deadly to your investments.

Best wishes,

Tony Sagami

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