Give Yourself an Edge Using China’s Rigged Small Business Racket

Markets across the globe are having a great week, as the two main sources of economic uncertainty have been lifted.

Late on Thursday last week, it became clear that the UK’s Conservative government had won a landslide victory in the country’s general election.

This means that the latest Brexit deal is the final one, and that the UK will officially be leaving the European Union in January, 2020. This ends the three-and-a-half-year long story of Brexit, full of twists and turns as negotiations dragged on, were cancelled, completed, reopened, and more.

Finally, we might be free of having to hear about Brexit all the time.

Then, last Friday, even bigger news hit. The White House and China announced that the parties had agreed to a “phase one” trade deal.

As part of this deal, both sides agreed to cancel billions of dollars’ worth of new tariffs meant to go into effect this past Sunday, December 15, and reduce others that were already in effect.

The deal is a clear success for the U.S. China will buy more from American farmers, energy companies, and factories, and has agreed to step up protections against Chinese companies stealing trade secrets from U.S. businesses.

But we may be getting far less than we bargained for with this deal.

Because China just instituted a new policy that could make any intellectual property protections toothless.

No one’s talking about it.

But you need to see how it could affect your investments.

Historically, China’s smaller companies have been vastly outperformed by its huge companies. That’s about to change. Little known amnesty programs are providing a literal unfair advantage for China’s small cap stocks.

Here’s what’s happening and how you can pad your account with extra profits by investing in these undervalued companies.

China Has Long Been Preying on American Know-How

Pushing China to protect the intellectual property of international firms has been President Trump’s key demand in trade talks since the very beginning.

So how that part of the deal is actually enforced on the ground in China is crucial. Not only to this “phase one” deal, but also to the more comprehensive trade deals the U.S. and China will negotiate in the future.

Basically, China has long been requiring foreign companies doing business there to share their trade secrets with Chinese businesses. Sharing their know-how made licensing, approvals, and market access easier, and sometimes doing business was downright impossible without it. And there were outright thefts of intellectual property by China’s companies and government as well.

Meanwhile, companies that produce counterfeits of American goods or break trademarks and patents have long gone unpunished.

As part of this deal, China has promised to finally step up laws and enforcement against trademark theft and patent violations. The country is also saying it will stop pressuring foreign companies to share their trade secrets.

That all sounds great. And it’s made for bullish headlines, sending the markets up in a flurry of optimism.

Unfortunately, those headlines aren’t giving you the full picture.

Here’s what’s really happening on the ground in China…

China’s Economy is Struggling

China’s economic growth has been slowing for years. In 2010, the country’s GDP grew at a staggering 10.6%.

But ever since, it’s been trending down:

Now, bear in mind, these are official numbers from the Chinese government.

In other words, they are cooked.

But even these “sanitized” numbers show a trend that has the ruling Chinese Communist Party worried. And now, after growing an estimated 6.2% this year, the Chinese government is aiming for just 6% next year.

That may sound really high compared to our own growth of about 2 – 2.5% this year, but China is still catching up on a per capita basis with the rest of the world, and millions of people leave the Chinese countryside every year looking for work in the cities.

Without economic growth, that’s going to create millions of angry, unemployed citizens with nothing to do but think about what life would be like without the Chinese Communist Party.

In other words, the Chinese government needs growth to continue.

That’s why they are pushing billions of dollars in stimulus packages and bailouts. Already, the government is planning for $426.20 billion in new “special” bonds to boost regions around China.

Even so, Chinese companies are defaulting on bond payments at the highest rate on record, and several banks have been taken over by the government in order to save them.

Here’s what’s in it for you…

Like It or Not, Chinese Small-Caps are About to Outperform

Add American sanctions to all that debt, and you can see why the Chinese government is looking for anything that will keep businesses afloat and unemployment down.

In the past, letting companies steal trade secrets and patents from foreign companies was one way of doing that. It basically meant Chinese companies got new technology “for free,” without having to spend on research and development.

This meant faster growth and higher employment. That’s most likely part of the story of how companies like Alibaba Group Holding Ltd. (BABA), Baidu Inc. (BIDU), Tencent Holdings Ltd. (TCEHY), and others grew so big, so quickly.

But now, as part of this new trade deal, China is promising to step up enforcement against this kind of intellectual property theft.

At the same time, as you just saw, the Chinese are doing everything they can to keep growth and employment from sinking any lower.

Their solution could endanger the trade deal longer-term…

But in the short-term, it will provide you with a good trade.

See, in the first nine months of this year alone, Chinese prosecutors dropped 42% more criminal cases against businesses than last year, and dropped 24% more cases against business owners and employees.

That’s 8,565 cases dropped and 10,973 lawbreakers walking scot free, despite being credibly accused of everything from fraud to assault.

The stated goal by Chinese prosecutors is to keep employment up and prevent Chinese businesses from going under.

In other words, Chinese prosecutors now have a policy of looking the other way at crime, as long as the criminals run businesses and have employees.

Now, this isn’t just wrong, ridiculous, and absurd.

It’s also not sustainable.

Eventually, this will only make the debt problems facing China’s economy worse.

But in the meantime, here’s what it means for you.

First, it means that this “phase one” trade deal everyone is so ecstatic over could have problems over the long-term. If the enforcement malaise mentioned above is not corrected – especially in terms of IP enforcement, the U.S. could respond by re-applying tariffs and the whole trade war could begin another downward spiral.

After all, if this new amnesty for Chinese business owners extends to intellectual property laws, then Chinese companies will continue to steal American trade secrets. Things could even get worse, despite the trade deal.

However, this will not have any real market-moving effects for at least six months. The new IP protection promises by the Chinese government will take time to design and implement, and we won’t be seeing any results of the new policy for quite a while.

But there is something you can do with this information in the short run – and it is the kind of thing that can fatten up your trading and investing account…

That’s because this amnesty policy is likely to benefit smaller Chinese businesses more than the giants.

Any potential fraud involving larger companies like Alibaba, Baidu, or Tencent would involve so much money that the authorities would have to get involved.

But smaller, local businesses will probably be allowed to get away with half a million dollars here, two million there.

This is ridiculous. It’s no way to run an economy. And in the end, it will cost China the most, when it all comes crashing down. Running without “the rule of law” always ends badly.

And we’ll see the signs long before that happens.

But before it does, an amnesty for small Chinese businesses means Chinese small caps will outperform Chinese large caps.

Chinese small-cap stocks have significantly underperformed the large caps for many years, and on their own, they’re a great value play. But the amnesty movement will pave the way for real financial upside for these small companies. So you can buy an ETF like the iShares MSCI China Small-Cap ETF (ECNS) to ride that wave up.

We haven’t seen the end of this yet. But let’s make some money while it plays out.

Great trading and God bless you,

D.R. Barton, Jr.

P.S.: As you can see, China will do anything to protect its economic interests. That includes potentially going to war with anyone that threatens those interests. We’ve seen a massive military buildup in the disputed South China Sea in recent years, with China challenging anyone that dares to cross the airspace – even the United States Navy.

And the threat has just become even more dire. This week, China deployed its first home-built aircraft carrier to the South China Sea to force face-to-face encounters with foreign vessels and aircraft in a bid to gain control of the disputed waters.

The Chinese have an alarming superweapon – known as the Assassin’s Mace – that they believe is capable of defeating even the formidable U.S. Navy. But they couldn’t possibly be more wrong.

Thanks in part to a small $6 defense contractor with a top-secret technology, the Pentagon has an ingenious new checkmate move designed to stop a Chinese sneak attack dead in its tracks.

This critical contractor is expected to skyrocket exponentially once this story goes mainstream, and I do not want you to miss out. Frankly, you need to see this before it’s too late…

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David Belden

You Can’t trust the Chinese.

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