I had an amazing time at the Beijing Olympics, and even though I didn’t have tickets for the closing ceremony, I did watch it on TV and was again blown away by the scale, precision, and choreography of the Chinese.

The two-hour show, which included one of the largest firework displays I’ve ever seen, a cast of thousands of costumed performers, acrobats, stunt men on springs and cheerleaders was a breathtaking spectacle that I will remember for many, many years.

And I was even more astonished by the superhuman feats of athletes like Michael Phelps’ eight gold medal performances and Usain Bolt’s trio of world records.

You’d have a hard time finding anybody who wasn’t blown away by the Beijing Olympics and the job of the Chinese organizers.

But as exciting as the Olympics were, the question we investors should be asking ourselves is what happens next to the Chinese economy and stock market.

The Quick Answer Is Up, Up, Up

Here’s why:

First of all, history is on China’s side: The stock markets of Olympic hosts increased an average of 21% in the 12 months after the games. And China’s rally was started with a bang on August 20 when the Shanghai Composite Index surged 8% in a single day! I bet there is a lot more to come.

If you thought the Beijing Olympics were spectacular, wait until you see China’s economic moves in the months and years ahead.

The Chinese stock market is jumping for a sound fundamental reason: Chinese companies are generating real profits. In the first six months of 2008, profits at the big state-owned corporations increased by 23%.

Valuations of Chinese stocks had gotten quite pricey, but the combination of rising profits and lower stock prices now has the average Chinese stock priced at a bargain-basement 15 times earnings. That is cheap, cheap, cheap for companies that are growing like weeds on Miracle Gro.

On top of those fundamental reasons, Chinese leaders are about to stomp on the gas pedal to get China’s economy moving.

The Best Is Yet To Come

It didn’t get a lot of attention by the western media, but a July 25 meeting of the Chinese Politburo announced a monumental policy change that is going to make investors smile from ear to ear.

The big change is that the Chinese are switching priorities. Instead of cooling down their overheating economy, China’s top objective now is to sustain the rapid growth of its financial system.

“We must maintain steady, relatively fast development
and control excessive price rises as the priority tasks of
macro adjustment,” said Chinese Premier Hu Jintao.

For the last five years, Chinese policy makers have been pushing on the brakes to keep inflation and growth under control, but will now stomp on the gas pedal to keep the economy humming.

How will the Chinese Communist Party make that happen?

High Octane Fuel #1: After letting its currency rise against the dollar in the first half of this year, China’s central bank is vigorously pushing its currency down against the dollar to help preserve the competitiveness of Chinese exporters.

High Octane Fuel #2: Chinese authorities have raised export tax refunds for garment manufacturers. The government raised rebates on textile exports by 2% to 13%, reversing a decision last year to cut such rebates in hopes of narrowing China’s swollen trade surplus.

High Octane Fuel #3: The Chinese central bank, the People’s Bank of China, has increased bank lending limits by 10% to support small businesses.

High Octane Fuel #4: China’s leaders are carefully considering an economic stimulus package of about $60 billion that includes new infrastructure projects and tax cuts. “Although the details are yet to be sorted out, there is such a plan, and it has been approved by a central finance planning team,” state-run Xinhua News Agency reported.

Infrastructure projects include a doubling of the rail network by 2020, a 75% increase in the number of freeways, a 70% increase in the number of airports by 2010, and a 280% increase in shipping port capacity.

Ambitious Chinese infrastructure projects include a 280% increase in shipping port capacity.

High Octane Fuel #5: The China Securities Regulatory Commission is pressing listed companies to adopt more generous dividend policies. The CSRC expects firms to pay out at least 30% of their profits to shareholders and companies that do not will be heavily penalized by not being able to float new bonds or sell additional shares.

“Giving fair returns to shareholders is part of listed firms’ responsibilities and is the foundation of stable and healthy development of the securities market,” said the CSRC. “We’ve noticed that some listed companies lack continuous and steady long-term dividend systems.”

This heavy foot on the accelerator is the most positive economic news I’ve seen happen in China this year, and I absolutely believe that the next major move for the Chinese stock market is going to be higher.

A lot higher.

So in my opinion, now is the time to add some Asian spice to your portfolio. I advocate a narrow, rifle shot approach to investing in China and stick to what I call my three C’s: cargo, construction, and Chuppies (Chinese yuppies).

The sky’s the limit for Chinese construction activity.

In simple terms, you want to stick to the companies that are transporting what China makes to the rest of the world … companies that benefit from the largest construction boom seen by man … and companies that cater to the needs of the rapidly growing Chinese middle class.

I’m talking about companies like Genco (NSYE:GNC), China Communications Construction (Hong Kong:1800.HK), and LVMH (Paris:MC.PA).

Or, if you’re more of a fund investor, you may want to take a look at PowerShares Golden Dragon Halter USX China (PGJ) ETF or a China-focused mutual fund like U.S. Global China Opportunity (USCOX).

But whichever vehicle you prefer — funds or individual stocks — just get started and don’t waste any time getting on board because I think the post-Olympic moon shot is about to leave the launching pad.

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Last 5 posts by Tony Sagami

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