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Thursday, July 30, 2009
When the Chinese government decides to get behind an industry, it goes all in.
Consider what happened with the Chinese power industry. In 1979, the government rigidly controlled electric power production. Only 60% of the country's small towns and villages had electricity – leaving 400 million people in pre-industrial conditions.
For the next two decades, the government focused on a massive electric-infrastructure program. Even so, by 1998, 14,000 villages and more than 8.8 million households were still without electricity.
Finally, in 2002, the government broke the national power company into five government-backed companies. The Chinese government decentralized the power industry and allowed the market to set the price of electricity.
Jim Rogers, in his book A Bull in China, calls that decision a watershed moment for China's power industry. The five resulting companies, China Power Investment, China Huaneng Group, China Guodian, China Datang, and China Huadian were huge successes. By 2005, more than 99% of the country's small towns and villages had electricity.
Investors made a killing, too. Investors in Huadian Power International, a public subsidiary of China Huadian, made 560%. Investors in Datang International Power Generation, a subsidiary of China Datang, earned 1,160% on their investment in just seven years.
The massive growth in electrical capacity also fueled an explosion in the coal industry. Coal supplies the fuel for 70% of China's electricity generation. Chinese coal stocks roared higher... In 2001, you could have bought Yanzhou Coal (YZC), China's only publicly traded coal company, for around $2. By late 2007, you'd have made more than 1,000%.
Now's not the time to invest in China's coal or power sectors. The opportunity for astronomical gains there is gone. But that same kind of growth is showing up in China's mining industry.
In the 1950s and 1960s, the Chinese government explored the country for mineral resources. But it lacked the technical expertise to extract what it found. It wasn't until the late '70s that it began the slow process of modernizing its economy. One of the first areas the government focused on was mining...
In 1979, China opened up two autonomous regions to foreign companies for exploration. China's government knew that was the only way to gain access to foreign capital, expertise, and equipment.
The program's success caused the government to open 11 new mineral-exploration areas in 1986, and 10 premier precious-metals regions in 1997.
Welcoming foreign mining expertise has completely reinvented the nation's mineral industry. In 1997, China produced just 45.8 million ounces of silver. In 2007 (the most recent data available), it produced 160 million ounces. Its gold production rose 134% over that same period.
In other words, the country went from practically no silver or gold production to become the third-largest silver producer and the largest gold producer in the world in less than 20 years – thanks to the government's push.
The thing to remember is, while these mining regions have been open to foreign exploration for more than a decade, most of China's enormous wealth of metal is still in the ground.
Mines don't appear overnight. Exploration and mine development take years. China's decades-old decision to open its mineral resources to foreign mining companies is just now coming to fruition.
And now, China's government is providing an enormous boost to its mining industry: In April, the country's Foreign-Exchange Agency announced the purchase of 16 million ounces of gold for state coffers. It wants to diversify its reserves, replacing some of its U.S. dollars with something tangible – like gold.
China has a lot of money to spend... nearly $2 trillion. I expect a lot of that money to flow to national mining efforts – and investors who buy in today. In other words, investing in China's gold mining industry today is like investing in Chinese coal miners in 2001.
About a dozen publicly traded companies are mining or exploring for China's massive gold and silver deposits. Many of them are plenty risky... and some are complete duds. But with the right few miners, you could be celebrating quadruple-digit returns in a few years' time.
P.S. Chinese gold stocks can feel a little like the Wild West for inexperienced investors. That's why having the government on your side can make all the difference. I've pinpointed the four best government-backed investments to buy to make 10 times your money as China modernizes its gold and silver mines. Click here for the details.
In The Daily Crux