Chinese Power Play? – These Stocks Should Go Higher

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, the Global 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:

1. 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.
2. 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.
3. 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.

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