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October 1, 2008

China Savings Bank

I have been convinced for a very long time that China would challenge, if not supplant, the United States as the world's leading superpower. How long have I believed this? During my post-graduate years in the early 90s, I wrote a newsletter... the old fashioned kind that used ink and paper... that was known by a familiar name: The DOCument. At that time The DOCument had more of a political spin and boasted a circulation of 14, mostly close friends and family, and was "distributed" in four countries. In a 1992 letter I wrote the following line:

"China, under a capitalist system, will be the next great world power."

China is certainly more capitalist now than 16 years ago, and its stock market delivered a 6-bagger in the middle years of this decade. Since its peak a year ago, the Chinese market has folded to the tune of 70%, bouncing off a pivot level from 2004:

china index chart

The time to begin claiming a stake in China's success may be presently approaching. From a technical standpoint, I would like to see the SSEC successfully test its recent low and then crack its downtrend line. Should this scenario unfold, I intend to jump in with an initial position of about 2-3% of my portfolio. I will probably make use of the Matthews China Fund and have any distributions automatically reinvested. After the initial investment, I will add to the position on a quarterly basis in an amounts based on a percentage of my trading profits for the quarter.

This plan is quite boring, I know, but that's the point. If I have the China story right, substantial wealth will build over time, and by "time," I mean decades. My father secured himself a comfortable nest egg by purchasing utilities in the early 1980s and following this very plan: reinvesting dividends and adding to shares from other income sources. China does not offer quite the dividend return as utility shares, but I believe the growth potential is enormous.


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