Money Morning Article of the Week
By Keith Fitz-Gerald, Chief Investment Strategist, Money Morning
Reports of a coup in the past week have startled many long-time China watchers.
Of course, we’ve seen next to nothing in the Western media about it despite the fact that what is going on behind the scenes now may be the biggest political play we’ve seen in decades.
Not to mention a massive opportunity for Money Morning readers.
Call it a “coup” or a “power play” if you like. Either way, recent events in China suggest the Chinese Communist Party is badly fractured at the very top.
Former Ambassador Jon Huntsman notes that the split may be the most significant since the tumultuous Tiananmen Square era – a sentiment I share based on more than 20 years of involvement with Chinese markets.
Why talk about Chinese politics here? For three good reasons…
The power play we’ve just witnessed – albeit from the fringes – is likely to result in a stronger “order” in China, along with increased spending and a big global expansion from China in the months ahead.
Let me explain.
Behind the Scenes in the Chinese Coup
Western media widely reported that Premier Wen Jiabao, China’s No.2, unceremoniously and very publicly sacked rising star Bo Xilai on March 14.
But nobody went any further, nor did they bother to understand that what’s happening behind the scenes is the real news.
Not only is the way in which this was handled uncharacteristically public, but the sacking itself is unusual. Bo is the son of a revolutionary hero and wildly popular for his anti-corruption initiatives in Chongqing, one of China’s largest megalopolises.
Bo was known to be angling for a seat on China’s standing nine-person politburo working committee, which would make him one of the most powerful men in China. That’s not a problem in and of itself, as many people ultimately want to be on that committee and spend their entire lives working toward that goal.
However, Bo is the only politician to move his agenda independently of Beijing’s ruling elite in nearly 40 years. That makes him – or made him — dangerous because he single-handedly threatened the political status quo.
To call his rise to prominence divisive is an understatement.
Premier Wen Jiabao voted against Bo’s promotion to vice premier. President Hu Jintao is rumored to dislike his money-grubbing ways.
Yet, none other than Jiang Zemin, the former leader of the Communist Party and the real No.2 in the CCP’s Standing Committee, has helped further Bo Xilai’s career as has Zhou Yongkang, who is also a Standing Committee member and hardliner.
Fast forward to March 19.
That’s when reports of gunfire, military vehicles and plainclothes police swarming the central government leadership compound of Zhongnanhai in Beijing surfaced.
Within hours, all three were shut down or squashed by China’s Internet police.
The Chinese media claimed the extra security involved the protection of a high-level North Korean official who was meeting with Chinese diplomats.
Bo Xilai’s political mentor, political guardian and standing politburo member, Zhou Yongkang, is apparently missing or under house arrest. He was seen briefly meeting with Indonesia’s minister of foreign affairs, Marty Natalegawa, on March 23 but that’s likely scripted by Hu Jintao and Wen Jiabao.
Zhou is China’s spy chief and head of internal security. He would definitely have the means to engineer an overthrow.
Meanwhile, 85-year-old Jiang Zemin is reported to be in a vegetative state. Presumably, he did not participate in recent events. Or, as is probably the case, he did and this story is planted to allow him to save face.
That would normally be the work of the state’s English language mouthpiece, the Global Times. However, that was not to be.
In fact, theGlobal Times published an unusually blunt editorial asking Beijing’s central leadership for direction on how to deal with rumors of the attempted coup. It also suggests more than a little confusion over who is running China…a fact I find interesting considering that the coup didn’t “officially” happen.
The Aftermath of the Chinese Coup
So now what?
Leadership purges in China happen all the time, but usually at much lower levels in the party. They are usually non-events. But this is much bigger, and there will definitely be follow-on maneuvering.
Above all else in China, stability is what the government wants. The Chinese military in particular doesn’t want to rock the boat, because any change in the political structure potentially undermines its stranglehold on business and economic development.
You’d think the Chinese military would be more concerned with bombs and bullets, but in actuality, the People’s Liberation Army is highly entrepreneurial and has its hands in everything from airlines to pharmaceuticals. Their operations may encompass as many as 15,000 companies generating revenues of more than $10 billion according to Tai Ming Cheung of Kim Eng Securities.
My read on what’s happening is that this is very different from students rioting in the street. This is the top guys maneuvering for power in a high-stakes game of chess.
Bo Xilai’s summary dismissal is nothing more than the hammering down of a “nail” – Bo Xilai -who stood up, albeit in a highly and uncharacteristically public fashion.
Using history as our guide, we can expect a few things:
- The top officials, including Hu Jintao and Wen Jiabao, will make public appearances in the weeks ahead implying that the situation is normal and it’s business as usual. All senior Communist Party officials around China will take similar actions followed by highly scripted loyalty pledges from military and local officials in that order.
- Behind the scenes, the Communist Party’s Central Commission for Discipline Inspection will be on a witch hunt designed to ferret out anybody who could be a threat and remove them.
- China’s businesses will go on a renewed growth spurt at Beijing’s explicit direction; this is intended to create an internal distraction for the people and defray international criticism while paving the way for China’s once-in-a-decade power transition later this year.
Three Stocks that Could Benefit
Now for the fun part, what does this mean for our money?
The trick is to steer clear of the regional players for the moment – there’s still too much uncertainty in that we don’t know which company leaders are loyal nor to whom.
Focus instead on the bigger players with large market share, a critical part in China’s strategic interests and a neutral role that will survive regardless of what happens in Beijing.
I can think of three at the moment:
- CNOOC Ltd (NYSE: CEO): One of China’s largest offshore oil exploration and production companies, CNOOC is a clear beneficiary of China’s international strategic energy initiatives. It’s trading at 8.91-times earnings, has no qualms about working in inhospitable parts of the world, and sports a dividend of 2.70%.
- Huaneng Power International (NYSE: HNP):This company is a “red chip” in the making. China’s electricity demand is growing at double-digit rates and this company serves 18 provinces already as one of the nation’s largest independent power producers. It’s doing a lot of innovative research and trades at a comparatively low future P/E of 9.18. The yield is an appealing 4.90%.
- ChinaMobile Limited (NYSE: CHL): This is China’s (and the world’s for that matter) largest telecom carrier by customers. As Chinese consumers make their way up the economic ladder they should continue to upgrade into China Mobile products. The company operates with a 23.84% profit margin and delivers a very solid 20.52% return on equity. The company also boasts a 3.40% yield for good measure.
And if you’re bothered by China’s markets, which have taken a shellacking in recent days, don’t be.
China’s economic ascent will continue.
Beijing never lets a good crisis go to waste.
Related Articles and News at Money Morning:
The Real China Story: It’s What Premier Wen Didn’t Say That Matters
Related Articles at Global Economic Intersection
China: Has There Been a Coup of a Coup? (GEI News, 01 April 2012)
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