August exports in China plummeted 23.4% from a year earlier as the global economic crisis continued to take its toll on developed countries. However, industrial production in the Red Dragon still managed to grow, indicating the best is yet to come for the world’s third largest economy.

Boosted by a $586 billion (4 trillion yuan) government stimulus package that is stoking domestic demand, output at China’s factories gained 12.3% year-on-year last month. A poll of 15 economists by Bloomberg News showed a median estimate of 11.8% production growth.

“Exports won’t truly recover unless China’s main trading partners such as the U.S. and Europe regain growth next year,” China International Capital Corp. economist Xing Ziqiang told Bloomberg, adding that trade “will continue to be a drag on the recovery.”

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Still, the production growth is a testament to China as a market in its own right, as its middle class continues to expand and consume goods:

• Auto sales in the nation are surging and may reach 12 million this year, surpassing the United States as the No. 1 market.
• There’s more than twice as many wireless phone users in China as there people in the United States.
• And Snow beer, which supplanted Bud Light as the world’s most popular brew earlier this year, comes from the Red Dragon.

Additionally, retail sales climbed 15.4% in August from a year before, beating the median estimate of 15.3% by analysts polled by Bloomberg. South Korea’s largest carmaker, Hyundai Motor Co., upped its 2010 production capacity in China to 600,000 from 500,000. And new loans in August were 410.4 billion yuan, up from 355.9 billion yuan in July.

Any concerns about inflation amid the huge stimulus package were momentarily quelled in August, when consumer prices fell 1.2% from a year earlier and producer prices showed a 7.9% decline. China will raise interest rates “around next spring” when inflation will rise to as high as 5%, BNP Paribas SA economist Isaac Meng told Bloomberg.

When western economies do recover, China, where everything from iPhones to desktop fans are made, will return to its status the export powerhouse of the world.

China expects its economy to grow 8% this year and that growth will almost certainly accelerate when a recovery takes hold in the United States and Europe.

China said Friday the flood of positive indicators has it on the right track to achieve its expected 8%growth for the year.

“The data from January to August has laid a good foundation for realizing the eight percent economic growth target for the full year,” Li Xiaochao, a spokesman for the National Bureau of Statistics (NBS), said in a press conference. “So far, the main reason why the overall economy is stabilizing and starting to recover is that we adopted the stimulus package to expand domestic demand.”

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China and Iraq will sign a deal next week to develop the Ahdab oil field, 100 miles southeast of Baghdad, at time when political gridlock and security concerns have cast doubt over several pending short-term contracts.

The new agreement, valued at $1.2 billion, is a variation of a deal struck with the state-owned China National Petroleum Corp. in 1997, when Iraq was in the clutches of Saddam Hussein.

“The Chinese contract was signed with the former regime,” Hussein al-Shahristani, Iraq’s oil minister, said in an interview that appeared on Iraqi news Web site al-Noor. “It’s valid. It was unfair because it was a production-sharing contract. We have negotiated with them for a year. It was turned from a sharing contract into a service contract.”

Al-Shahristani, will put the finishing touches on the deal during a visit to China early next week, when he is joined by Latif Hamad, governor of the Wasit province – where the Ahdab field is located.

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“The governor will discuss the logistic cooperation with the Chinese company, especially the security side,” provincial spokesman Majid al-Atabi, told The Associated Press.

The deal with China is one of several contracts Iraq is touting in an effort to boost oil production by roughly 500,000 barrels a day, from 2.4 million barrels to 3 million barrels by the end of 2008. Iraq then hopes to increase production to 4.5 million barrels a day by 2013.  As it stands now, the country sits on estimated 115 billion barrels of reserves, but exports a meager 2 million barrels a day – 10th in the world.

Thirty-five foreign oil majors were invited to bid for contracts to provide technical support and help boost production in eight oil and natural gas fields last month. However, it was recently reported that oil majors are balking at the commitment, as the terms of the contracts have been shortened, and security concerns and political gridlock have undermined any progress.

“It appears that on present form (the Iraqi government) probably won’t proceed with most of these or all of them,” Charles Ries, coordinator for Iraq’s economic transition at the U.S. embassy told reporters earlier this week. “But I think that some of the companies are open to continued discussions even on relationship grounds, and some of the companies… don’t think it’s worth their time.”

Ries said that the contracts lost much of their appeal when Iraq reduced the length of their terms from two years to one, and when it became clear that companies who signed wouldn’t be given any preferential treatment for future long-term deals. Ries added that the deals, worth about $500 million apiece, “were never going to be hugely lucrative.”

Iraq has been negotiating with Royal Dutch Shell PLC (RDS.A, RDS.B), BHP Billiton Ltd. (ADR: BHP), BP (BP), Exxon Mobil Corp. (XOM), Chevron Corp. (CVX), Total S.A. (ADR: TOT), and a consortium of smaller firms led by Anadarko Petroleum Corp. (APC),  according to Reuters.

Anadarko has already pulled out, but officials insist negotiations are ongoing. An anonymous Iraqi official responded to reports that talks had disintegrated Wednesday, telling the AP that deals with Shell, BP, Exxon, Chevron, and Total were “still on the table,” and “none of them has pulled back.”

Development of the energy sector will be crucial to Iraq’s reconstruction and development, as oil accounts for 90% of export earnings and 70% of the country’s gross domestic product.

News and Related Story Links:

• Money Morning:
  Iraq Looks to Rebuild Once Prominent Energy Sector by Opening its Doors to Foreign Oil Majors

• New York Times:
  Iraq Poised to Revive Oil Contract With China

• The Associated Press:
  Iraq, China to ink Ahdab oil deal next week

• The Associated Press:
  Iraq: Talks with oil giants continue

• Reuters:
  Iraq likely to abandon short-term oil contracts – US

China’s policymakers are considering a $58 billion (400 billion yuan) economic stimulus package, and will ease monetary policy later this year, as focus shifts from taming inflation to promoting economic growth, said Frank Gong, chief China economist at JP Morgan Chase & Co (JPM).

The stimulus package would be equivalent to 1%-1.5% of the nation’s gross domestic product (GDP) and aimed at smaller businesses struggling with high material and energy costs, a strong yuan, narrowing export demand, and the government’s credit tightening.

"The top leadership is carefully considering an economic stimulus package," Gong wrote in a note to clients. "This will include tax cuts and measures to ‘stabilize domestic capital markets’ and support ‘healthy development of the housing market’."

Gong, who in 2005 correctly predicted that China would end its currency peg to the dollar, also said the central bank will ease monetary policy "later in the year" as inflationary pressures subside and exports slow in the face of a global economic downturn.

The People’s Bank of China has kept interest rates unchanged this year after six increases in 2007 in an effort to undercut inflation and keep the economy from overheating. Of course balancing inflation and growth are proving tricky for China.

While consumer prices, which hit a 12-year high of 8.7% in February, receded to 6.3% in July, producer prices jumped 10% from a year earlier – an indication that corporate profit margins are caught in a vice.

There is now a growing concern that corporate profit growth will hit a virtual standstill in 2009, causing an economy that has experienced double-digit growth for five straight years to finally fall back down from orbit and into single-digit territory.

Those fears were exacerbated by Lehman Brothers Holdings Inc. (LEH) recent prediction that China’s GDP growth would fall to 9.5% in 2008 and 8% percent in 2009.

China’s economy grew at 10.1% in the second quarter, still the fastest rate of growth among the world’s 20 largest economies, but a slight decline from last year’s 11.9% annual expansion.

The benchmark Shanghai stock index is also on the way down, having plunged 56% since the start of the year.

"China’s economy is suffering from unstable global factors, increasing challenges and hardships," Xav Feng, China head of research at Lipper Inc., told China Daily.

"China’s top priorities for macroeconomic control in the second half are maintaining stable but rapid economic growth and controlling inflation. This is proof that the government has become more cautious on macroeconomic controls, and monetary policy won’t be so tight in the future," he added.

This sentiment was corroborated by China’s second quarter monetary report, released Friday, which dropped any reference to monetary policy as "tight." In the previous report, released in May, China’s central bank said it would "place a higher priority on containing price rises and curbing inflation, and implement a tight monetary policy."

The second quarter report, however, said the central bank would "make its top macroeconomic priorities maintaining stable and relatively fast economic growth."

Inflationary risks "can’t be neglected," the report noted, but added that "external demand will continue to weaken, and the negative impact on exports, economic growth and employment will emerge further."

That shift in priorities was evidenced in July, when the Bank of China raised lending quotas for national banks by 5% and regional lenders by 10%, potentially allowing banks to extend about $26.3 billion (180 billion yuan) in extra loans over the rest of 2008. Those limits previously had been put in place to crack down on excess liquidity flowing freely through the market.

"Concerns over China’s export health will translate into a complete reversal of the current tightening policy," Donald Straszheim, vice chairman of Roth Capital Partners LLC told Bloomberg News. "Maintaining economic growth is now number one."

• Money Morning:
  China to Supplant U.S. as World’s Largest Manufacturer by Next Year

• Reuters:
  JPMorgan says China is considering stimulus package

• Bloomberg:
  China May Spend $58 Billion to Aid Growth, Gong Says.

• China Daily:
  Stocks plunge 5% to hit a new low 

• Wall Street Journal:
  Reading Tea Leaves: China’s 2Q Monetary Report.

• Bloomberg:
  China’s Economy Slows on Weaker Production, Olympics Closures.

• Money Morning Market Analysis:
  China Tries to Tap the Brakes on Growth,

With sky-high growth potential, China and India are the two markets no investor can afford to miss out on. But that doesn’t mean they’re impervious to market turbulence, and in times of trouble, India is the more reliable investment.

No doubt, both countries’ markets are suffering this year, with China’s Shanghai A Index down 50%, and India’s Sensex Index down 25%.  It’s no secret that India is struggling with both a growing budget deficit and mounting inflationary pressure. But China has problems too – it’s just hiding them under the carpet until the Olympics are over.

That’s why, for me at least, the investment decision is clear – I’ll buy the country whose problems are out in the open and already reflected in stock prices.

China’s Pending Credit Crunch

China’s inflation has been quiescent recently. It declined from 8.7% year-over-year in February, to 7.1% in June, taking it below the People’s Bank of China’s (PBC) one-year lending rate of 7.47%. Since the principal driver of global inflation has been the sharp run-up in energy and commodity prices, China’s inflation moderation is anomalous.

Apart from any figure-fudging in the run-up to the Olympics, China’s moderating inflation can be explained by increased state controls and subsidies. Rice and wheat prices have been controlled only since January, while energy subsidies have increased in 2008, from $22 billion to $40 billion, as the country holds petrol prices down to two thirds the U.S. level – around $2.85 per gallon in Beijing.

Those effects alone would suppress reported inflation by 3%-4%.

China has also used every effort to produce a quiescent population and clean air for the Olympics –1 million cars have been banned from Beijing streets for three months, for example. But once the Olympics are over, those Herculean efforts will no longer be necessary. We can then expect an easing of food price controls (which themselves require subsidies to bail out farmers) and a sharp reduction in energy subsidies. At that point, it seems inevitable that reported inflation will soar into double digits.

The PBC’s lending rate of 7.47% and deposit rate of 3.33% will then be highly inflationary. It will also provide substantial disincentives to saving. Since the Chinese authorities appear to understand the role of interest rates in controlling inflation, rates will no doubt be raised sharply, so that at least the lending rate will be in double digits, along with inflation.

A post-Olympic credit crunch will be the result, but it won’t affect the largest government-controlled companies. They will be bailed out if they run into difficulty. However, the crunch will be particularly damaging to small businesses, as well as the true private sector.

The Devil You Know vs. the Devil You Don’t

In India, on the other hand, wholesale inflation rose from 7% in March to almost 12% in July.  The Reserve Bank of India is also running negative real interest rates; they are currently about 8% nominal.

As in China, the Indian government is subsidising food and forcing the state-owned oil companies to sell gasoline to domestic consumers below cost. The result has been an explosion in the Indian budget deficit, which is thought by many observers to exceed 10% of India’s gross domestic product (GDP) in the fiscal year to March 2009.

Both China and India are dealing with excessive inflation, interest rates that are too low, and budgets that are out of balance (though China’s figures are so opaque one cannot be sure of the true position). Falling oil prices could help the inflation position in both countries, but it is unlikely that oil prices will fall enough to restore stability in either.

The difference between the two countries is that China is still under the impression that its inflation is a moderate and controlled problem, whereas India has no such illusions.

For this reason, I would be more tempted by an Indian investment in the current market than by a Chinese one.

When investing in India, it is advisable to focus on companies that are internationally competitive and active exporters, rather than looking at the domestic market. That’s because any budget or inflationary difficulties will probably be reflected in a weakening of the rupee, which will help exporting companies. It is also preferable to look for companies with, at most, moderate leverage, which are less likely to suffer from a banking squeeze.

Infosys Technologies Ltd. (ADR: INFY) is India’s premier exporter of software, with almost no debt, that is currently trading at about 17 times earnings to March 2009, with a dividend yield of 1.9%. That high rating reflects the growth potential of Infosys’ business sector, in the context of which it is reasonable.

Dr. Reddy’s Laboratories Ltd. (ADR: RDY) is India’s premier manufacturer of generic pharmaceuticals, poised to benefit in the 2008 – 2012 period as many popular drugs lose their patent protection and are opened to international competition. It has moderate debt, about 50% of equity, and is also selling at a multiple of 17 times earnings to March 2009, with a dividend yield of only 0.8%. Again, the relatively high rating reflects the growth potential in Dr. Reddy’s global business.

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• Money Morning Special Investment Report:
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• Money Morning Special Investment Report:
  Special Report: Hit the BRICs for a Global-Investing Double Play (Part II).
   
• Money Morning Special Investment Report:
  
  Why Every Investor Should Have a China Investment Strategy

• Money Morning Special Investment Report:
  
  Beijing’s $40 Billion Olympic Investment: How Investors Can Take Home the Gold

By Jason Simpkins
Associate Editor

China will overtake the United States as the world’s largest producer of manufactured goods by next year, according to forecasts by economics consultancy firm Global Insight Inc. done on behalf of the Financial Times. 

China will account for 17% of the world’s manufacturing value-added output next year, versus the United States’ 16%, the FT reported.

In 2007, the United States accounted for 20% of manufacturing output worldwide, while China made up just 13.2%. Also, last year, Global Insight predicted the United States would hold its top position until 2013, but a severe economic downturn has expedited China’s rise to the top.

China accounted for a mere 3% of global manufacturing in 1990, but its unprecedented rate of growth has made an economic miracle of the communist state.

John Engler, president of the National Association of Manufacturers, told the FT that it was “inevitable” that China would take over, if for no other reason than its size.

“This should be a wholesome development for the U.S.,” Engler said, “For it promises both political stability for the world’s largest country and continuing opportunities for the US to export to, and invest in, the world’s fastest-growing economy.”

China’s customs agency said yesterday (Monday) that July exports soared 26.9% to $136.7 billion. The nation’s global trade surplus was $25.3 billion in July, up 4% from a year ago.

"Though we expect a continued deterioration as the year goes on, as American and European consumers stay at home, the resilience of demand for China’s exports is still remarkable," said Standard Chartered economist Stephen Green in a report to clients.

China’s economy expanded by 10.1% in the second quarter of 2008, while U.S. gross domestic product edged up just 1.9% in that time. The U.S. economy grew at an anemic 0.9% pace in the first quarter after contracting slightly in the fourth quarter of 2007.

News and Related Story Links:

• Financial Times:
  China to overtake US as largest manufacturer

• Associated Press:
  China’s July trade surplus $25.3 billion

By William Patalon III
Executive Editor
Money Morning/The Money Map Report

As we’ve said time and again here at Money Morning, every investor has to have a China investment strategy.

And with the opening ceremonies for the 2008 Beijing Summer Olympic Games taking place today (Friday), this is probably as good a time as any to review the long-term case for a China investment strategy, and to look at the key factors investors should keep in mind as they put their investment plan into action.

An old Wall Street adage holds that "the trend is your friend," a precept that we wholeheartedly subscribe to. Indeed, as we’ve often told readers, the very best profit plays you’ll find will emanate from such powerful global market trends as globalization, the soaring demand for food-and-energy-related commodities, and the emergence of such new markets as Brazil, Russia, India and China.

And right now, some of the biggest global trends are being fueled by China’s white-hot economy, which is expected to advance at a double-digit clip this year – despite a global financial crisis that’s threatened to throw the U.S. economy into reverse.

But many investors are so concerned about that global financial crisis that they’re opting to avoid the volatile China market entirely, fearing there’s just too much risk within that growing Asian dragon.

Such fears are understandable: After all, the benchmark Shanghai Stock Exchange Composite Index is down 55.2% from its October peak, and was down as much as 58% – call it "double-bear-market" territory.

While "total avoidance" is certainly one form of China investment strategy – albeit an extreme one, at that – it’s not going to be a profitable one, at least not in the long term.

And the reason is simple: By avoiding China, investors are ignoring the facts – including the undeniable truth that China has become the world’s second-most-important country, and a reluctant superpower.

You need proof? Consider these facts:

• In 2007, China contributed more to global growth than the United States – becoming the first country to do so since the Great-Depression-ridden 1930s.
• China last year took over the top spot as the world’s largest consumer, pushing past the United States as the biggest user of four of the five most basic energy, food, and industrial commodities, Newsweek reported.
• China’s manufacturing sector is now bigger than its U.S. counterpart, with an output value that eclipses the $2.7 trillion in annual production generated by U.S. factories – a capability that could ultimately also enable the Asian Grand Dragon to position itself as a military superpower.
• And China is now the world’s No. 2 market for automobiles and the No. 1 producer of ocean-going merchant ships.

And this is just the beginning.

During a January 2007 speech in Beijing, economist and former U.S. Treasury Secretary Lawrence H. "Larry" Summers pointed out that Europeans who lived through the Industrial Revolution saw their standards of living increase by about 50% during their average 40-year lifespan. When industrialization spread to the more-entrepreneurial United States, living standards of the beneficiaries improved by four to five times. But residents of Asia – and especially China – who live through the ongoing "Asian Miracle" will see their living standards improve a hundredfold during their lifetimes – or 10,000%.

The wealth created from all this growth during our lifetimes alone will be enormous. But it won’t happen overnight, and it won’t occur in a straight line. Just as we’ve seen here in the U.S. financial markets, there will be periods of political and economic strife that whipsaw the values of such assets as stocks, bonds and real estate. Long-term, however, the trend is for the value of these assets to increase – and at a much steeper rate than we’ll see in any other market in the world.

That’s particularly true at a time when the United States may well be facing a Japanese-style "Lost Decade."

And that’s also why it’s crucial for every investor to have a China investment strategy.

[Editor's Note: In Part II of this story next week, we'll explore the key considerations that should go into any China investment strategy.  Global Investing guru Jim Rogers has been particularly critical of how the world's central banks have tried to "manage" the global credit markets. Indeed, in an exclusive interview with Money Morning earlier this year, Rogers predicted the failure of the U.S. Federal Reserve for this very reason. This is yet another reason why Rogers says that Asia - and specifically China - are the long-term antidotes for U.S.-only investment portfolios.  To find out more about Rogers' own China strategy and his favorite stocks - and to obtain a free copy of his new bestseller, "A Bull in China," check out this investing report.]

News and Related Story Links:

• Money Morning Market Analysis:
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• Beijing 2008 Summer Olympic Games:
  Web Site.

• Shanghai Stock Exchange Composite Index:
  Web Site.

• Wikipedia:
  The Great Depression.

• The Heritage Foundation:
  China’s Superpower Economy.

• Economic Research Speech:
  Lawrence Summers, Beijing Friendship Hotel, Jan. 14, 2007.

• Wikipedia:
  Lawrence H. "Larry" Summers.

• Wikipedia:
  The Industrial Revolution.

• Money Morning Special Investment Research Report:
  The Lost Decade: How the U.S. Financial Crisis Resembles Japan’s Ten Years of Misery – And How to Play it (Part I of II).

• Money Morning Special Investment Research Report:
  The Lost Decade: How the U.S. Financial Crisis Resembles Japan’s Ten Years of Misery – And How to Play it for Profit (Part II of II).

• Money Morning Special Investment Report:
  Special Report: Hit the BRICs for a Global-Investing Double Play (Part I).

• Money Morning Special Investment Report:
  Special Report: Hit the BRICs for a Global-Investing Double Play (Part II).  

Lenovo Group Ltd. (OTC: LNVGY) may be the world’s fourth-largest PC vendor, but strong earnings, a fast-growing home market in China, global expansion, and the company’s involvement as an official sponsor of the Olympic Games have positioned the brand for solid global growth for the next several years.

Lenovo, China’s biggest personal computer-maker, reported a 65% jump in first-quarter profit yesterday (Thursday), thanks primarily to strong performances in its European/Middle East/Africa (EMEA) marketing region.

Lenovo said net income climbed to $110.5 million, or $1.15 a share, for the three months ended June 30, a hefty jump from earnings of $66.8 million, or 74 cents a share, a year ago. Sales from continuing operations rose to $4.2 billion, from $3.81 billion the year before.

The gains came despite an overall sales decline of 4.8% in the company’s Greater Americas Region, which included a decline in the U.S. market.

"Despite a softening global economy, we delivered solid gains in worldwide sales, PC shipments and profits, achieving our seventh consecutive quarter of profitable growth with positive operating results in our international business," said Chairman Yang Yuanqing.

Revenue in the EMEA marketing region jumped 20% to $903.8 million. Lenovo’s PC shipments to these markets rose 26% in the quarter.

"In the PC business, it is important for companies to have good sales channels, and Lenovo has focused on this and got good results in Europe," Wang Wangli, an analysts with HSBC Holdings PLC (ADR: HBC) in Taipei who rates the computer-maker’s shares as an "Overweight," told Bloomberg News. 

Despite its emerging-markets success, however, Lenovo’s overall share of the global PC market slipped from 8% a year ago to 7.9%. The company remains the world’s fourth-largest PC vendor, trailing Hewlett-Packard Co. (HPQ), Dell Inc. (DELL), and Taiwan’s Acer Inc.

Of course, many analysts believe Lenovo will fare better over the long run because the company continues to be the Top Dog in China, with 27.9% of the market. Sales in Greater China, which accounted for 41% of the companies total business, rose 22% in the quarter, reaching $1.7 billion.

GfK Asia reports that volumes in Asia’s retail PC market expanded dramatically in 2007, with an average overall regional increase of 21%. The biggest increase was in personal portable computers, with an average regional volume increase of 45% year over year. China was the leader in sales growth, with a 53% increase in volume.

The Asia/Pacific PC market had a quarterly growth rate of 8% in the three months ended June 30, according to IDC. The market expanded by 15% year over year, as unit sales topped 19 million.

Lenovo topped IDC’s rankings, with 18.2 % market share for the last quarter.

In addition to strong earnings and home-field advantage in the world’s fastest-growing PC market, Lenovo also was named an official sponsor of the Beijing 2008 Summer Olympic Games.

Three Things Lenovo Learned from the Olympics

Lenovo, the only Chinese company among the International Olympic Committee’s 12 top-tier sponsors, will supply a total of 30,000 devices to the games, including 12,000 ThinkCentre M55e desktop computers, 2,000 LJ7800N and LJ3500 printers, 800 Think Pad T60 and Zhaoyang 680 notebooks, and 700 SureServer T350, R630, and R520 servers.

Of course, the commitment has meant more than supplying equipment to the games. Energy consumption requirements had to be met to accommodate Beijing’s "Green Olympics" theme. Machinery also had to be equipped to handle humidity in such damp locations as Qingdao and Hong Kong. And because thousands of broadcasters are using Lenovo terminals to connect the Commentator Information System (CIS) to provide live commentary to their audiences, the Beijing Organizing Committee for the Games (BOCOG) insisted on quiet machines that would not exceed 30 decibels.

The company also selected about 600 Lenovo engineers to work with its gear. The candidates were chosen from a group of 12,000 hopefuls via an exam system that made serving in the Olympics business unit an honor. After completing tests for engineering knowledge, technical skill and English-language ability, candidates came to Beijing for four weeks of training.

"We prepped for two years for [the 2006 Winter Olympics in] Torino, and Beijing is four times the size of Torino," Wu Min, Lenovo’s director of technical support for the Olympics business unit, said in an interview with NetworkWorld.

Wu also said there were three major lessons the company learned from its involvement in the Olympics.

First and foremost, Lenovo gained the knowledge and experience of learning "how to support complicated and huge projects." Second, the company learned more about adapting products and design to better suit users’ needs. This lesson is an important one, because like teaching its technicians English, Lenovo will have to change the way it communicates with its customers if it is going to maximize its global-market potential and evolve into more than just a homegrown brand that’s strong in China.

"Initially, in Torino, some of those products were selling only in China. Now they are selling worldwide," Wu told NetworkWorld. "The user experience is entirely different. It helps us address different requirements of international vendors and their expectations for customer satisfaction. It taught us how to meet those requirements."

Finally, Lenovo gained a tremendous amount of experience in dealing with ad hoc organizations.

"Now we know how to address this, in terms of negotiation, prioritization, and bringing together different levels of experience," Wu said.

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• Bloomberg:
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• NetworkWorld:
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• PR Newswire:
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• ChinaTechNews:
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• Money Morning:
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China’s emerging middle class is chasing after the global consumer dream: name brand products.

And the companies that make those products are profiting from China’s growing desire for genuine merchandise rather than cheap knock-offs to grow their brands throughout the Asian nation.

One such company is sports apparel maker Adidas AG (OTC ADR: ADDYY). This past weekend marked the opening of the Adidas’ largest retail store in Beijing, the crown jewel in the German firm’s China expansion.

Adidas already has 4,000 retail shops in over 500 Chinese cities, and the sportswear maker is planning to open even more. By 2010, there will be 6,300 Adidas stores across China with an expected $1.5 billion (1 billion euro) in annual revenue.

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"Building shops in China is relatively inexpensive compared to places such as Europe. Costs are extremely reasonable," Frederic Seiller, Adidas’ vice president for retail in China, told Thomson Financial News.

Costs are cheap, but Adidas products command similar prices to their European retail counterparts, Seiller said. Plus, nearly 50% of Adidas goods are produced in China, keeping down shipping costs in the region.

Adidas is hoping for a big boost in visibility in China due to its association with this summer’s Olympic Games.

"The Beijing 2008 Olympic Games will serve as a platform for the Adidas brand to become the leading sports brand in China in 2008," Erica Kerner, director of Adidas’ Beijing 2008 Olympic program, told BBC News.

Adidas’ "Impossible is Nothing" marketing blitz surrounding the Olympics represents the company’s largest marketing campaign in a single market to date and Adidas hopes it will pay off big.

China’s Olympic Brand Recognition

Other well-known names round out the list of top International Olympic Committee partners including Money Morning favorites The Coca-Cola Co. (KO) and McDonald’s Corp. (MCD).

With the Aug. 8 opening ceremony a little over a month away, these "Global Titans" are hitting China with a full-blown advertising assault.

McDonald’s has been selected as the Official Restaurant of the Beijing 2008 Olympic Games. The fast food giant has plans to build four restaurants in Beijing that will cater to the athletes, the news media and spectators who attend the sports events. McDonald’s also has a Champion Kids promotion to give 300 children a chance to attend the Olympic games.

To celebrate and promote the diversity of the Olympic Games, Coca-Cola designed multilingual labels "that feature multiple languages including those of the U.S., Bangladesh, China, Egypt, Georgia, Israel, Korea, Nepal and Sri Lanka," the company released in a statement. "Connect with the World Over a Coke" is the beverage maker’s slogan for the Games.

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• Forbes:
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• Money Morning:
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The moment Beijing won the right to host the 2008 Summer Olympics, the Chinese government embarked on an ambitious cultural etiquette program designed to make Beijing more hospitable to the 500,000 foreigners expected to visit for the Games, which start only weeks from now.

And from the looks of things, such obvious niceties as…

• Learn English.
• No spitting.
• And, stand in line.

…weren’t enough. For Beijing now wants to make the country’s cuisine more appealing, as well.

On that point, at least, China’s leaders aren’t acting a moment too soon.

When Cultures Connect – or Collide

It can be quite difficult for English-speaking visitors to keep a straight face when placing an order at a luncheon business meeting in China – given such menu choices as "chicken without sexual life" (Translation: Chicken that’s very tender because it was too young to reproduce when it was turned into a roaster), or "wood flower picks sea cucumber hoof." At the same time, for veteran travelers such as myself, there’s also a certain fondness for these descriptive dishes. It’s part of the culture.

Which is why I’m torn after hearing reports that such listings as "the farmer is small to fry king" may vanish from my favorite restaurant menus along with the "fragrant spring onion sauce explodes the cow son." And let’s not forget the perennial classic – "retchup" – either.

But all joking aside, this is the kind of change that is emblematic of China’s emergence on the world stage. And it’s an important sign for investors that things are proceeding as planned. China’s leaders understand the new role their country will be playing – a role that will result in much greater visibility and far more stringent scrutiny, part and parcel of the global power and influence the country will very soon possess.

Particularly in Asia, as much as language reflects a culture, it also reflects change and frequently mirrors the underlying social and economic agenda long before the results show up in company share prices.

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And while anthropologists and etymologists study the former (language reflecting culture and change), investors should anticipate and then study the latter (economic shifts and resultant escalations in market prices). The reason: China’s history (and, indeed, the history of other nations, as well) is filled with linguistic examples that precede massive economic change and growth – for better or for worse.

In a Money Morning report just last month, I made a similar point by demonstrating how language subtleties actually alerted Asian observers of a major change in Sino-Japanese relations – a historic development that the Western media largely missed.

The current changes involve only China, but are no less important – or telling.

For instance, Chinese texts show that words like "grape," "pomegranate" and "lion" entered the picture back during the days of the fabled Silk Road. Indeed, they actually preceded the first great wave of foreign trade centuries ago.

Other so-called "loan words" in more recent times reflect the growing interaction between countries in the Asian Rim – especially Japan – during the late 1800s. That, too, presaged a new blossoming of China’s society at the beginning of the 1900s.

And while there is great debate about who borrowed what from whom, modern Chinese language reflects entire concepts borrowed from the Japanese language that have been transformed into something called wasei-kango (literally Japanese-made Chinese). Words like diànhuà (denwa, "telephone"), shèhuì (shakai, "society") are great examples.

According to Chinese and Japanese academics who study this sort of thing, there have even been cases where words have gone from Chinese to Japanese and back again. One such example is jīngjì (keizai). In original Chinese, it meant "the workings of the state." But it was narrowed to mean "economy" in Japanese before making the full circle to be re-adopted as part of the modern Chinese language, according to Wikipedia.

Lately, there’s been a whole host of Chinese words emerging as a result of increased western contact and/or influence. Examples include:

• gāoěrfū, "golf"
• kělè, "cola"
• hēikè, "hacker"
• bókè, "blog"

Not to mention China’s "taikonaut," which is the English nickname for Chinese astronauts known as yǔhángyuán, or "travelers of the universe."

Not surprisingly, these new words mirror the emergence of consumerism and technology  – trends we’ve been following closely as we invest in China.

As new words develop and new slang enters the lexicon, we’ll be watching carefully. Not only because these will be interesting in and of themselves, but because of what they suggest about future business trends.

In the meantime, I’ll be in the Hall of Mental Cultivation (Yangxindian)…

Money Morning Investment Director Keith Fitz-Gerald studies a sign for the Hall of Mental Cultivation in China’s historic "Forbidden City" in Beijing, China, this past spring. Fitz-Gerald was in China to lead an investment tour of subscribers from Money Morning and The Money Map Report. Fitz-Gerald also is the editor of the specialized trading service, The New China Trader.

News and Related Story Links:

• Wikipedia:
  Silk Road.

• Money Morning Economic Analysis:
  Lost In Translation: The Subtle Dealings Between China and Japan Can Lead to Powerful Profits.

• TravelChinaGuide.com:
  Forbidden City — Hall of Mental Cultivation (Yangxindian).

Baosteel Group Corp., China’s largest steel producer, will pay $4.2 billion in cash for an 80% stake in a new Guangzhou-based steel mill that will merge two rivals, Shaoguan Iron & Steel Group and Guangzhou Iron & Steel Group.

China is already the world’s top steel consumer and producer, churning out one-third of the global supply. This newly formed company, Guangdong Iron & Steel Group Corp., will boost Baosteel’s capacity by 33% to 40 million tons.

Specifically, it will help supply steel-hungry Toyota Motor Corp. (ADR: TM) and Honda Motor Co. (ADR: HMC), both of which have plants in the city of Guangzhou.

Baosteel also wants to build a new 10 million ton-capacity mill in Zhanjiang, Reuters reported.

Baosteel is making a fervent effort to squash local competitors and streamline operations – now more than ever – because it’s facing skyrocketing costs of iron ore, the key ingredient used in steel production.

The day it announced the merger, it also agreed to pay Australia-based Rio Tinto PLC (ADR: RTP) an average of 85% more for iron ore this year, Australia’s The Age reported. The price increase is a result of fierce demand for iron ore, but also because Rio Tinto and Aussie rival BHP Billiton Ltd. (ADR: BHP) have significantly lower shipping costs than Brazil-based rival, Vale (RIO), the world’s largest iron ore exporter, which allows them to charge a premium. 

According to Bloomberg data, shipping iron ore from Australia costs about $55 a metric ton less than from Brazil. But China doesn’t have much of a choice, as its economy is growing at a 10% annual clip.

And that extra coin Rio Tinto and BHP have pocketed is dually driving up global prices and testing China’s patience.

It’s also playing a huge role in Australia’s commodity-exporting industry, which may earn 12% more than forecast for March and a record $203 billion for the year, Bloomberg reported.

"The consistent story here is that producers haven’t been able to match the ever-growing demand from China," Gerard Burg, an energy and minerals economist with National Australia Bank Ltd. (OTC ADR: NABZY), told Bloomberg. "China’s demand is still going and still very strong."

News and Related Story Links:

• Reuters:
  Baosteel to pay $4.2 billion for Guangdong acquisition

• The Age:
  Rio’s Ship Comes Sailing In

• Bloomberg:
  Australia Raises Commodity Sales Forecast on Prices