By Keith Fitz-Gerald
Investment Director
Money Morning/The Money Map Report

CHONGQING, People’s Republic of China - For “Show me” skeptics who want proof that every investor needs to have a China investing strategy, a visit to this industrialized city would likely be enough to change their mind.

Chongqing – which many people still remember by its wartime name of “Chungking” – sits squarely in the heart of the Sichuan province and is a municipality of 33 million people. Covering some 220,000 square miles, the extended province surrounds the city itself. Chongqing is basically a big fertile strip running along the fabled Yangtze River, and the “Three Gorges” hydroelectric project.

I’m writing this while aboard the Victoria Queen on a three-day trip down the river. It’s providing a unique vantage point from which to take in much of what is modern China – constant construction and ambitious progress.

That’s actually an excellent description of Chongqing, which I can see as I look across the confluence of the Yangtze and Jialing rivers. Indeed, it’s an almost-surreal sight.

Then there’s the noise. Like any working waterfront, Chongqing has a rhythm all its own. There’s an overall general din, a kind of blended audio backdrop. But if you concentrate, you can also pick out individual sounds, too. There’s the groan of heavy machinery at work on the waterfront; the voices of a thousand different dockworkers; and staccato barking of the ever-present vendors selling anything you can imagine. Somehow it all works.

Every time I visit this city, I’m struck by progress here. Areas that were rice paddies only last year are now the foundations for huge buildings. New highways and construction zones stretch out as far as I can see. And there’s no evidence of a slowdown anywhere that I can see.

That’s precisely why it’s worth a look at Chongqing’s plans for the future.

The day before our visit, city officials and other dignitaries laid the foundation stones for the Chongqing Financial Center, which will serve as the hub for the city’s new Central Business District, or “CBD” for short. This isn’t just a building. It’s a $4.4 billion development project that’s designed to transform Chongqing into an inland China financial hub by 2015.

The project is noteworthy on a couple of levels. For starters, it’s the first commercial real estate project in the Jiangbeizui central district and its scale is truly massive. The core will consist of nearly 1 million square feet of what here in the U.S. market would equate to new Class A office space. Such an ambitious project may seem outrageous to a world struggling with the credit crisis, but in China it is pretty much standard business fare these days.

China’s inner regions have been less affected by the global financial crisis than the export-dependent coastal regions, which is why growth remains impressive and on track. Chongqing, for example, saw its first-quarter gross domestic product (GDP) advance by 9% on a year-over-year basis. And local officials are very candid in stating that Chongqing’s growth may be 50% higher than the national average next year – and it’s as much as 40% above the national average right now.

Chongqing has the region’s mostly dynamic industrial base, with very solid international partnerships that are carefully balanced with local consumption. Ford Motor Co. (NYSE: F), Honda Motor Co. Ltd. (NYSE ADR: HMC) and Suzuki Motor Corp., for example, all have huge manufacturing facilities here that are turning out products for domestic Chinese consumption. And they’re still running flat out.

Another thing that bodes well is Chonqing’s unique geographic position. Because it’s nestled between two of China’s major rivers, the city is uniquely positioned as a gateway to China’s Western development. In that sense, it’s much the same as Xian in that much of the money Beijing will unleash to spur Western provincial development will flow through this region. And that means the pace of progress here is likely to accelerate – rather than slowing down – anytime soon.

History suggests that we’ll see a flood of infrastructure companies head this way, as well as the usual grouping of high-technology, financial and securities companies in the next few years. As this growth continues, it will continue to underscore – in dramatic fashion – why every investor needs a China strategy now, more than ever before.

News and Related Story Links:

• Money Morning View From China Series:
  Three Gorges Dam Project Demonstrates China’s Domestic Growth Ambitions.
• CCTV International:
  Old Opera House Reopens in Chongqing.
• ChinaCulture.org:
  Yangtze River.
• CNN.com:
  Three Gorges Dam.
• Money Morning View From China Series:
  China Pursues Worldwide Growth Opportunities Caused by the Global Financial Crisis.
• Money Morning View From China Series:
  While the Rest of the World is Stuck in Reverse, the China Auto Market Zooms Ahead.
• Money Morning View From China Series:
  China-Russia Oil Accord a Sign of a Changing World.
• EncyclopediaBritannica:
  Jialing River.
• Alibaba.com/China Knowledge:
  Chongqing aims to develop into a financial center by 2015.
• China Association for Science and Technology:
  Chongqing Science and Technology Museum slated for official opening in September.

MAOPING, People’s Republic of China – I’m often asked if there are investment risks in China.

My answer: Absolutely… there are investment risks everywhere.

But it’s how you evaluate and manage those risks that will ultimately determine how well you do in this highly promising market.
Needless to say, not all risks are the same.

As an example, let’s take a look at China’s surge in lending – and the potential for that country to have a credit crisis of its own. This year, the Bank of China Ltd. is expected to issue as much as $1.32 trillion (9 trillion yuan) in stimulus loans. That’s in addition to the $670 billion (4.58 trillion yuan) that the Bank of China had already lent during this year’s first quarter, and is almost as much as the state-run commercial bank lent during all of 2008.

China, of course, is legendary for its lack of financial transparency, and has actually brought financial misappropriation to an art form.

“Most companies have two, maybe even three sets of books, so when investors evaluate them, they have to know where the cash really moves … now more than ever,” Johnson Chien, managing director of Global Consultants and Services (Shanghai) Ltd., said recently.

While the numbers vary, estimates suggest that some 20% to 30% of all loans extended have actually been diverted for re-deposit or for “stir-frying” purposes.
Re-depositing is the practice of obtaining loans at extremely low interest rates and depositing them in the issuing bank to earn a profit in higher-yielding bank accounts.

“Stir frying” is the Chinese slang term for putting the money into Chinese markets in an attempt to manipulate share prices and profit. But most of the money has come back and remains “performing” at least to date.

In a related wrinkle, a hugely disproportionate amount of money (at least, by Western standards) is loaned out on a long-term basis, only to be paid back a month later. While this creates havoc with asset matching, this helps the borrowing company look more financially active than they are and presumably appear sounder at the same time. Asset matching, in case you are not familiar with the concept, refers to the practice of having long-term loans extended against long-term assets, and short-term loans extended against short-term assets.

When long-term funds are lent against short-term assets, or vice versa, there is a “mismatch.” I can recall a case in Japan – during that nation’s “Go-Go” era – where a major corporation used 90-day revolving debt to finance its new $45 million regional headquarters building. [Never mind that this was in complete violation of General Agreements on Tariffs and Trade treaties, because the 90-day loans were passed from bank to bank ... that's another story for another time.]

This kind of short-term/long-term mismatch is actually surprisingly common in many Asian markets – including China – because it’s a strategy that can help a company obtain still more funding, especially during times of high growth. The rough equivalent in U.S. terms would be a person who borrows money even though he or she may not need it and then pays it back in an attempt to boost his or her personal credit rating.

The lending crisis in the United States was the result of two things:

• Derivatives contracts that were unmonitored.
• And improperly categorized risks unseen by both management and regulators alike.

Here in China, however, the real danger stems from lending driven by guanxi, or “connections.” [Although the West defines guanxi as "connections," that's actually something of an oversimplification; some sociologists have actually likened it to "social capital." But even that doesn't capture all of the nuances that make the Asian culture so fascinating to watch and study.]

Because the social concept of "face” is so important in Asian cultures, there has historically been a tendency to lend money on a preferential basis to favored clients based on nothing more than the connection between lender and borrower – regardless of actual credit worthiness.

China’s bankers are learning quickly, however. Beijing is keenly aware that many banks may not have been properly checking the creditworthiness of their borrowers, so the government has taken steps to implement stricter lending requirements even as it has increased the amounts of lendable cash available.

While many Western executives claim to have been surprised by the credit crisis, I find it interesting that many of China’s bankers seem to be anticipating a credit crunch of their own. Indeed, a recent survey by China Orient Asset Management Corp. of 333 banking officials – including 89 risk-management officers – found that more than half the respondents expected their bad loans to rise in 2009. Additionally, nearly 40% of the respondents expected sharp increases in non-performing loans within the first half of the year.

Yet, few bankers expect Beijing to turn off the lending spigots anytime soon. Many of my contacts here in China concur. While Beijing could certainly do so, it wouldn’t be in its interest to cut back on new loans, or to change the rules when it comes to stimulus-driven-lending programs – at least not for the time being. After all, there’s just too much riding on China’s ability to maintain a high rate of economic growth.

Beijing remains optimistic it can hit its growth targets, although “caution” is becoming the watchword around here. And as long as the growth imperative remains in effect, consumers and businesses here can have every expectation that the money will continue to flow from the banking faucet – even if an increasing percentage of that credit is destined to turn into “bad.”

But that’s okay: Confidence is what Beijing wants right now.

News and Related Story Links:

• Money Morning Market Analysis (Part I of II):
  The Lost Decade: How the U.S. Financial Crisis Resembles Japan’s Ten Years of Misery – And How to Play it.
• Bank of China:
  Official Global Web Site.
• Wikipedia:
  Bank of China Ltd.
• Wikipedia:
  Face.
• BusinessDictionary.com:
  Asset matching.
• Wikipedia:
  General Agreement on Tariffs and Trade.
• FindArticles.com:
  China Orient Asset Management Corporation Selects Sagent to Boost Business Efficiency.
• Wikinvest: 
  Metric: Non-performing Loans to Total Loans (U.S. Banks).
• Money Morning View From China Series:
  China/Taiwan Investment Accords Will Lead to Profit Plays for Investors.
• Money Morning View From China Series:
  Three Gorges Dam Project Demonstrates China’s Domestic Growth Ambitions.

By Keith Fitz-Gerald
Investment Director
Money Morning/The Money Map Report

FENGDU, People’s Republic of China – Mainland China companies will soon be able to invest in Taiwan for the first time in 60 years, thanks to investment accords reached between the Association for Relations Across the Taiwan Straits (ARATS) the Straits Exchange Foundation (SEF).

This is literally history in the making.

Not only do the accords considerably broaden goals Beijing has pursued since 1979 in an effort to stimulate cross-Strait links, but they also remove many of the restrictions that presently hamper more direct business-and-investment ties. For instance, airline flights are going to be “regularized,” and the chartered flights that have long been the only way to move between Mainland China and Taiwan will be replaced by regularly scheduled trips. There were also important agreements forged regarding crime prevention and financial cooperation.

While the immediate goals include a broadening of the strict investment conditions for Mainland China companies interested in expanding into Taiwan, both mainland and Taiwanese companies anticipate broad cooperation in such diverse sectors as solar energy, herbal medicine, automobile-parts production and aviation tie-ups to top the priority list.

Taiwan’s vaunted semiconductor industry appears to be off limits, for now, but I anticipate that will change within the next 24 months as Taiwanese authorities become more comfortable with mainland Chinese companies making direct investments into Taiwan-based firms – even to the point of acquiring a controlling interest.

If you remain skeptical, don’t forget that Taiwan’s United Microelectronics Corp. (NYSE ADR: UMC) just invested $285 million to acquire Chinese semiconductor manufacturer HeJian Technology (Suzhou) Co. Ltd., a move that gives it a solid foothold in Mainland China.

This is all big stuff, and it’s pivotal when it comes to investing because it forges links that many of the Chinese and Taiwanese people I’ve spoken with thought they’d never see. And it also reestablishes other previously existing links that many folks thought were lost forever.

Zhang Guanhua, the deputy director of the Chinese Academy of Social Sciences Institute of Taiwan Studies, recently told The China Daily that the agreements are “vital to the realization of direct trade across the Straits.”

I couldn’t agree more and have noted as much for several years. I’ve also noted that any agreements facilitating that type of cross-Strait trade would likely be accompanied by an enhanced currency-clearing mechanism designed to facilitate the movement of trade-related money – a key first step that will help the Chinese yuan gain valuable international exposure and help propel it to its eventual place among the world’s leading currencies, an important goal of the Chinese government.

And that’s exactly what happened.

As part of the ARATS/SEF agreements, Taiwan and China agreed to establish the regulatory framework needed for financial services firms to do business in each other’s markets. The two countries also called for the gradual establishment of a mutual clearing system for the Taiwanese dollar and Chinese yuan.

Having such a system in place will not only enhance Mainland China’s interest in making additional investments into Taiwan, it will also accelerate interest among Taiwan’s investors and companies to seek profit opportunities in Mainland China.

And rest assured, there will be a strong global spillover impact. Expect these dealings to nurture a serious interest among international investors and accelerate stock-market action in both countries – action that, up to now, was held back by the lack of a financial links of the type the accords create.

I can hardly wait to see what happens next, and I’m already carefully studying several promising companies that could be yet another rock in the foundation that becomes New China.

I’ll be reporting more on those opportunities very soon.

[Editor's Note: Today's issue of Money Morning features two stories related to this one. In the first, accessible by clicking here, Contributing Editor Martin Hutchinson details three Taiwan profit plays that investors might want to consider. In the second, Investment Director Keith Fitz-Gerald continues his investment travelogue from China, detailing the lessons that can be learned from the Three Gorges Dam project, which he just visited. For that additional installment to Fitz-Gerald's "View From China" series, please click here. The additional stories are all available free of charge.]

News and Related Story Links:

• Money Morning Financial Markets Analysis:
  China Flexes its Muscles and Finds Support in a Bid to Dump the Dollar as the World’s Main Reserve Currency.
• Wikipedia:
  Association for Relations Across the Taiwan Straits (ARATS).
• Xbitlabs.com:
  United Microelectronics Acquires Chinese Chipmaker.
• Wikipedia:
  Mainland China.
• HeJian Technology (Suzhou) Co. Ltd:
  Corporate Web Site.
• Wikipedia:
  Straits Exchange Foundation (SEF).
• Breitbart.com:
  China, Taiwan ink accords on regular flights, financial services.
• Wikipedia:
  Taiwan Strait/Formosa Strait.

By Keith Fitz-Gerald
Investment Director
Money Morning/The Money Map Report

BEIJING, The People’s Republic of China - For the debt-ridden West, the global financial crisis has been an unmitigated disaster, forcing the so-called developed economies to take on financial commitments that will serve as burdens for years, if not for generations.

For cash-rich China, however, the financial crisis is shaping up to be a major opportunity, with payoffs that will last for decades.

You want proof? The China Council for the Promotion of International Trade (CCPIT) has spent the past four months surveying businesses about the effects of the worldwide credit crisis. And its findings are both fascinating – and instructive. According to the CCPIT, 85% of the businesses it’s surveyed say that their overseas business has suffered as a result of the credit crisis. A mere 7% plan on expanding their output this year.

Yet a whopping 40% of the companies surveyed say they are planning to expand their overseas investments during the next 24 months.

That matches up well with what my contacts have been telling me – as well as what I’ve observed during my visit here: Companies that are planning to expand beyond their home market in China view overseas investments as part of a long-term strategy that will help them improve their corporate profit margins even as they bolster their brand’s stature in the global marketplace.

As I’ve been telling audiences around the world for much of the past year, many of China’s top business executives and government leaders view the credit crisis as a colossal opportunity. They’ve been able to look past the problems the crisis has caused and look to the opportunities the crisis has created because so many companies around the world have been forced to pull back – or have foundered altogether.

As these visionary leaders see it, now is the time to expand aggressively and establish market positions that fulfill current goals even as they enable China to better position itself for future growth.

Clearly, many challenges exist – with product quality and product safety being two of the most visible, given the attention those problems have received here in the United States. But those are really minor details, even though the Western press has made them into a major issue.

If you want to look forward and see how we expect China’s expansionist push to work out over the next few years, you need only consider Japan’s experience as it transformed itself from a defeated and occupied nation and into a manufacturing superpower (before unrelated, speculative excesses cost it its position of global leadership).

People forget that it wasn’t all that long ago that the phrase “Made in Japan” turned a product into a joke. Within a few years, those who had been laughing may well have been weeping over the profit opportunity that they’d missed out on.

China’s going to travel that same path – but to a much bigger payoff. After all, China’s got 10 times the manufacturing strength Japan had, is learning at a far more rapid rate, and has the benefit of being able to learn from the miscues that Japan and the United States have made.

Also at stake is the nature of credit insurance and foreign exchange. People are so focused on deficits of al flavors that they forget China’s still developing these areas, too. As recently as the 1980s, there was very little international credit available. And, comparatively speaking, that’s still the case.

But probably not for long.

If we look forward a few months, I expect China’s overseas investments to accelerate as that country’s capital markets continue to mature. In 2008, cumulative overseas investments reached $130 billion. Overseas investments in non-financial entities soared 64%, reaching $40.6 billion. At that pace, it’s conceivable that China’s investments could grow by an additional $100 billion over the next 24 months.

We’ve already told Money Morning readers to watch as China continues its global shopping spree, spending money to lock in supplies of crude oil, mined minerals, and all sorts of other commodities that will become quite scarce when global growth resumes – as it most certainly will. At a time when most nations (and their corporations) are being forced to retrench, and save money, China and its companies have the cash to create these captive suppliers, which will put it in a great competitive position later on. Just wait and see.

At a time when the West is still handing out Band-Aids, that’s an interesting opportunity to think about, because so few Westerners understand that China’s economy is investment-driven. That lack of understanding is understandable, since our economy is consumption-driven, meaning many investors just don’t even understand the basic concepts at play here, let alone the profit opportunities that emanate from them.

This is an area I address constantly in my presentations about China, since it highlights why this Asian giant – more than any nation on earth right now – is poised to lead the way for the next century or so.

There’s simply so much room for more stimulus-driven growth, with comparatively few of the excesses that have blown up the Western monetary system.
Some people will disagree, and I respect that. However, numbers from a variety of sources seem to suggest that my analysis is right on target.

For instance, according to the Chinese Academy of Social Sciences, China’s economy will advance at an 8.3% pace this year. That’s a prediction, incidentally, that falls smack into the most recent range highlighted by both Standard Chartered Bank PLC and UBS AG (UBS) of 6.8% to 9% in 2009. The latest figures show that approximately 43% of that growth in gross domestic product (GDP) will result from national account expenditures, while consumption will contribute about 36%.

For purposes of comparison, consider that the U.S. economy is driven 70% by consumption and roughly 30% by expenditures.

No wonder China sees the fresh market opportunities flowing out of the global financial crisis.

[Editor's Note: Ten consecutive trades. All profitable. After he launched his Geiger Index trading service late last year, Money Morning Investment Director Keith Fitz-Gerald went 10 for 10, meaning he closed every single one of his first 10 trades at a profit. And he did this in the face of one of the most-volatile periods since the Great Depression. Fitz-Gerald says the ongoing financial crisis has changed the investing game forever, and has created a completely new set of rules that investors must understand to survive and profit in this new era. Check out our latest insights on these new rules, on this new market environment, and check out Fitz-Gerald's new service, the  Geiger Index.]

News and Related Story Links:

• ChinaHighlights.com:
  Beijing Hutongs.
• Money Morning Analysis:
  China Flexes its Muscles and Finds Support in a Bid to Dump the Dollar as the World’s Main Reserve Currency.
• Chinese Academy of Social Sciences:
  Web Site.
• China Council for the Promotion of International Trade:
  Web Site.
• Money Morning News Analysis:
  What Companies Are Profiting From China’s Commodities Crusade?

By Keith Fitz-Gerald
Investment Director
Money Morning/The Money Map Report

BEIJING, The People’s Republic of China - At a time when global auto sales are experiencing their biggest declines in decades – they are set to drop at least 8% globally – the burgeoning China auto market may grow by 10% or more.

With steeply rising disposable incomes and savings rates that approach – and in some cases exceed – 35% a year, it isn’t difficult to see why the China auto market is zooming along. But what may be tough for U.S. consumers to picture – especially as they deal with rising unemployment and a nagging economic malaise – is the intensity with which domestic demand is growing here in China.

Autos are more than just transportation here. They’re a symbol of wealth and success – a sexy status symbol. One’s social position can be determined by the type of vehicle one owns and flaunts.

This isn’t the first time we’ve detailed the promise of the China auto market. Nor is it the first time we’ve talked about the “Chuppies” (Chinese Yuppies), the demographic group China will rely on as the nation attempts to decrease its reliance on exports and become more of a consumer-driven economy.

Investors, economists and other “experts” on China are finally becoming attuned to this economic transition. But what those observers don’t realize is that the story doesn’t stop there. China isn’t just evolving into a consumer economy. As auto sales demonstrate, China is becoming a “complete” economy, in which such key ingredients as consumer spending, domestic business investment and foreign investment are each increasingly playing their required role.

Take business spending. The auto has become an important business tool: It’s believed that having your customers see an impressive car conveys confidence and helps build trust with the government. That kind of thinking is very Western in focus. What’s different here, however, is that cars are also believed to be a key contributor to the concept of “face,” which is ever so important here.

Huang Jin, a native Beijinger and longtime friend, explained it this way: “If you drive a late-1980s-model Japanese car, people will not want to do business with you. Your car suggests how much you are worth and, by implication, whether you are worth doing business with.”

He drives an Audi A8 that’s jet black, with all the trimmings. [Given his objective, the A8 was apparently an excellent choice. Its U.S. marketing tagline says that "(even) motionless, it still commands respect."]

Another friend of mine, Luo Xin, puts a different spin on things. The way he sees it, the car he drives makes a statement about who he is – which is why he craves the sporty, futuristic proto-types that were all over the Shanghai exhibiting center this week as part of the Auto Shanghai 2009 auto show.

“Why not dream?” he says. “The new stuff suggests that I’m hip and gives prospective wives the image that I am successful, enjoy my life and think about the future.”

Julian Hardy, who serves as general manager for Aston Martin China, recently told the China Daily newspaper that China’s mega-rich may have lost 1 billion yuan (about $146 million), but adds that they’ve “still got 5 billion ($730 million) left.”

Aston Martin, long the preferred ride of fabled super spy James Bond, sold 50 cars here last year and sales may hit 150 within the next 12 months. It’s a similar story with Lexus. The company’s newest Shanghai store has already sold 20 cars since opening in mid April. And Ferrari, BMW (Bayerische Motoren Werke AG), Porsche (Porsche Automobile Holding SE), and any of a half dozen other high-end brands are finding a market among China’s emerging consumer class.

China recorded 15 billionaires last year, as well as several hundred thousand millionaires, so this is not a trend that’s going away anytime soon.

At the other end of the spectrum, low-end cars continue to move at record pace, too. Last year, we told readers that General Motors Corp.’s (GM) Buick line, Ford Motor Co. (F) and Volkswagen AG (OTC ADR: VLKAY) produce the lion’s share of the small, sporty and fuel-efficient models sold here. At the time, I suggested that it wouldn’t be long before Chinese automaker’s like Geely Automobile Holdings Ltd., Red Flag (or Hong Qi, as it’s known to its China customers), and BYD Co. Ltd., have come up to speed.

In fact, the MidAmerican Energy Holding Co., which is roughly 88% owned by the Berkshire Hathaway Inc. (BRK.A, BRK.B) investment vehicle run by U.S. stock-market icon Warren Buffett, announced in October that it would pay roughly $230 million for a 10% stake in BYD, which makes cars and specialized batteries.

I originally thought it might take as long as 24 months for China’s domestic automakers to really get traction, but somehow I have not been surprised to see how quickly the markets have evolved to accommodate utilitarian cars that are “basic transportation” in words only. Why Detroit can’t do this is beyond me; the so-called “Big Three” would be wise to take an extended field trip over here to learn how to get back into the ballgame.

A few years ago, I suggested that China would overtake the United States as the world’s largest car market. Now China’s done it not once, but for the last three months in a row, with sales reaching a record 1.1 million. Incidentally, at the same time I made that prediction, I also suggested that one or more of China’s automakers would enter the U.S. market. Now it’s all but a foregone conclusion. So stay tuned.

When it comes to cars – or to any other product or commodity for that matter – China’s newly moneyed class is not going away anytime soon. The estimated 330 million people in this country’s broad middle class continue to amass economic purchasing power at a rate that will exceed the capability of their counterparts in the U.S., Japanese and Eurozone markets combined during the next 12 months.

The bottom line: Investments focused on the ambition of China’s emerging consumer class may prove to be some of the best available in the coming post-financial-crash environment.

News and Related Story Links:

• Money Morning View From China Series (2008):
  The View From China: Despite the Auto Industry’s Pedal-to-the-Metal Growth, a Safety Play May Offer the Safest Play.
• Audi USA:
  The Audi A8.
• Auto Shanghai 2009:
  Auto Show Web Site.
• Aston Martin China:
  Web Site.
• Aston Martin:
  Web Site.
• China Car Times:
  Hong Qi (Red Flag) SUV to See Production in 2009.
• JamesBondWiki.com:
  The Ultimate James Bond Web Site.
• Lexus.com:
  Web Site.
• BMW.com:
  Web Site.
• Porsche.com:
  Web Site.
• Money Morning News Analysis:
  Berkshire Stake Brings Confidence and Credibility to Top China Electric Carmaker BYD.
• Wikinvest:
  Warren Buffett.
• The China Post:
  World’s automakers vie for China market.
• AxcessNews.com:
  Move over GM, Chinese automakers to enter US, CA markets.

By Keith Fitz-Gerald
Investment Director
Money Morning/The Money Map Report

BEIJING, The People’s Republic of China – It’s Day Two of my three-week trip here, and already I feel myself getting quickly reacquainted with this capital city.

If you’ve never been here, it’s hard to do this city justice with simple prose – and without sounding a bit cliché. Beijing – like much of emerging China – is special. And it deserves to be seen that way.

Beijing manages to be simultaneously frenetic and calm, and exudes an energy all its own. There’s no telling what’s around the corner or whom you’ll find here on a given day – literally. For instance, I found an immaculately detailed Ferrari in front of my hotel this morning, played pedestrian "chicken" with a custom Porsche Cayenne SUV in the crosswalk at noon and met world famous actor and Kung Fu legend, Jackie Chan, in the lobby this afternoon.

It’s easy to explain why I love this city.

I’m also fascinated by the political, economic and business intrigue that is making China one of the very best profit opportunities of our lifetime. If you want proof, just look at the most recent oil-supply deals that country has reached with Russia.

Energy Deals Assist Cold War Thaw

Not long ago, I wrote about how Russia and China were destined to be global partners when it comes to energy – and noted that it would be the United States that created the incentive for these two former Cold War warriors to link up. In a story published just a few months ago, I described how China’s energy foray into Iraq was the initial part of that strategy. Well now it’s time for Round Two of this strategy to unfold.

Russia and China recently signed a multi-billion-dollar, intergovernmental agreement to construct an oil line from Russia that will supply oil directly to China. Actually seven agreements in one, the terms depict a deal worth trillions of dollars – including a 20-year oil contract to pump Russian oil to the Chinese market. In return, China has agreed to provide a total of $25 billion in loans to Russian oil companies Transneft and OAO Rosneft Oil Co.

The terms of the contract are fascinating – and illuminating. Russia will provide China with roughly 15 million metric tons of crude per year from 2011 to 2030, with much of the "black gold" flowing through the 1,030-kilometer pipeline that’s being constructed to run from the Skovorodino refinery in Eastern Russia to Mohe County in China’s Heilongjiang province. It’s a branch of the even bigger 4,700 kilometers (2,900 miles) East Siberia-Pacific Ocean Pipeline that’s currently under construction.


Additionally, during talks leading up to the oil-supply agreement, both nations talked turkey on such topics as natural gas, nuclear energy, coal, electric power and resource-industry-equipment manufacturing.

Is America Being Relegated to Spectator Status?

What China and Russia very clearly understand (and that the Western countries have totally missed) is that this oil-supply deal is just part of a much bigger strategic drama that’s being played out here.

For its part, China believes that the oil pipeline will greatly reduce the risks of its oil imports, the majority of which come through the China’s oil imports the vast majority of which come through the Strait of Malacca. (Interestingly, China’s nuclear subs were just on parade for the first time ever as part of the 60th Anniversary of the founding of the PLA’s Navy in Qingdao, Shandong Province).

Russia, according to Prime Minister Vladimir Putin, believes that an oil pipeline directly to China will give Russia a stable and reliable oil market in the East. Not only will this help Russia access the capital markets, but it can also help that country access hard assets from other sources, tightening Russia’s grip on the top energy markets in that region of the world.

Either way, this deal is a game-changer – both for the two countries involved (China and Russia), as well as for those who aren’t (the United States, for instance).
And if you take a minute to read between the lines, comments made by leaders on both sides point to a desire to have an even tighter China-Russia relationship in the years to come. This will really lock the United States out of the game, and will also wrest an increasing amount of energy-pricing control from the Organization of Petroleum Exporting Countries (OPEC) cartel – two developments that I’ve repeatedly warned readers to watch for.

Russian Deputy Prime Minister Alexander Zhukov used surprisingly strong language when he remarked last month that it is highly possible Russia would become China’s largest energy supplier in 15 years. China Vice-Premier Wang Qishan noted that the package including all aspects of construction, loans and crude oil trade would become "immediately effective," which is translated literally from Chinese and which means that he’s putting the Chinese bureaucratic machine on notice that this is a high-priority project not to be trifled with in any way.

With good reason, energy is a key to both China’s ongoing development and to stability in that region. I fully expect to see more deals like this on a variety of commodities and natural resources in the next 12 months to 24 months. View each deal as a sign of a growing regional stability that could contribute markedly to China’s growing leadership power, as well as to a global recovery – all of which are important developments for investors looking at this part of the world.

News and Related Story Links:

• AsiaOneMotoring.com:
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• JackieChan.com:
  Official Jackie Chan Web Site.

• Money Morning Market Commentary:
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• Wikinvest:
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• SteelGuru.com:
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• Wikipedia:
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• UPIAsia:
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• FAS Strategic Security Blog:
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• China.org:
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• Wikipedia:
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• Wikipedia:
  Wang Qishan.