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Three Ways to Profit from China's Anti-Corruption Laws

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Opportunities for investors who like the country's potential but fear its risk.

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China is toughening up its disclosure rules for government officials -- the latest in a series of moves that should level the playing field for foreign investors who like the country's profit potential but fear its risk.

According to the Central Commission for Discipline Inspection (CCDI), top officials at various levels of government must now file reports that detail their personal property holdings and their investment activities. What's more, these reports must also disclose investment moves made by spouses, children, and other members of the immediate family.

This represents a major upgrade from a 1997 disclosure rule that required top party officials to report whenever they bought or sold houses, married foreigners, or traveled abroad.
Known then as the Regulations on Reporting Personal Matters by Leading Officials, the 1997 rules applied only to congressional members, administrative senior staff, judiciary members, and those in China's state-owned enterprises (SOEs) who held a rank of county official or higher.

Now these rules have been broadened, and they apply to everyone with the rank of county official or higher. And the expanded rules now also require the disclosure of local "gifts, salaries and cash accepted for work-related reasons."

Big Changes Should Translate Into Big Profits

This is a big change – and represents very good news for China investors. Consistent, long-term investment profits are at their maximum in markets where there's enough regulation to govern business behavior, safeguard profits, and protect property rights, but not so much that it stifles the entrepreneurial spirit.

These latest moves by China are perhaps the strongest evidence we've seen yet that Beijing understands -- and is even striving for -- this delicate balance. And it also shows me that China's leadership is serious about weeding out inefficiencies and boosting the government's regulatory muscle -- even as it adds to the economic freedoms available to China's citizens.

Although that seems like a contradictory statement, it really isn't. Much of what Beijing is doing with the new regulations is in direct response to citizens who voiced displeasure upon learning that there are huge disparities between what the average citizen earns and the compensation being given to some of the senior managers running China's SOEs.

For instance, there was a real, palpable outrage in China last year when earnings disclosures revealed that Fu Chengyu, who heads up CNOOC Ltd. (CEO) took home a record-setting $1.77 million (12.07 million yuan) at a time when the average annual worker's urban income is a mere $4,400 (30,000 yuan).

In one sense, this is nothing different than what the West has experienced as part of the fallout from the global financial crisis. But there's one exception: Wall Street, for instance, is already back up to pre-crisis bonus levels and up to its old tricks. In China, where the government is clearly committed to putting some real teeth into its regulations, don't expect a subsequent relaxation of those efforts.

In fact, I can outline two very specific incentives for stronger financial regulations. One involves the cost of corruption and the other has to do with China's long-term global aspirations.
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No positions in stocks mentioned.
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