The world’s largest steel company, Luxembourg-based ArcelorMittal (MT), expanded its presence in China last week when it acquired a 28% stake in a Chinese steel mill for $647 million. The company announced last Wednesday that it is now a minority shareholder in China Oriental Group Co. Ltd., whose main asset is a northern Hebei province mill that produced 3.62 million metric tons of steel in 2006, the Financial Times reported.

ArcelorMittal paid a 14% premium for the 820 million shares it acquired. ArcelorMittal is now the second-largest shareholder in the company.

China, by far the world’s biggest steel consumer, is set to drive global steel consumption up 6.8% in 2008, according to an October forecast from the International Iron and Steel Institute. Though foreign buyouts of industry assets are heavily restricted, ArcelorMittal became the only foreign company to directly own part of a Chinese steel company in 2005, when it bought approximately one-third of Hunan Valin Steel Tube and Wire Co. Ltd.  With its latest acquisition, the steel giant has carved out another niche for itself in the lucrative Chinese market.

ArcelorMittal would like to bring China’s eight- largest steel producer, Laiwu Steel Corp., into the fold, as well, but an attempt to acquire company shares are pending government approval. 

ArcelorMittal is also rumored to be interested in Tenaris SA (TS), an Italian steel-pipe producer.  Shares of Tenaris surged as much as 5% from $24.74 to $30.52 earlier this year on news ArcelorMittal was interested.

ArcelorMittal itself was formed after a bitter five-and-a-half-month battle between the Luxembourg-based Arcelor and Mittal Steel. The two came to terms last year, forming the world’s largest steel enterprise, with a dominant 10% share of the global market.

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Most experts view the pollution problem in China as one of the world’s biggest problems. But General Motors Corp. (GM) Chief Executive Officer Rick Wagoner views it as one of the world’s biggest business opportunities.

With incomes soaring and a new wave of middle-class consumers emerging across China, car and truck sales are soaring. But with clouds of pollution roiling the atmosphere, the market could very quickly migrate to such new technologies as alternative fuels and hybrid-powered automobiles.

GM is taking a decisive step to capitalize on that shift.

The Number One U.S. carmaker on Monday announced plans for a $250-million research and development center in Shanghai, The Associated Press reported.  The center will develop eco-friendly technology, including alternative fuels, hybrid cars, and more-efficient power trains, including those utilizing new technologies.

The R&D center will also serve as headquarters for GM’s China and Asian-Pacific operations. The main goal of the venture will be to help alleviate China’s surging pollution problems, while also capitalizing on the fastest-growing auto market in the world.

China has already become the world’s second-largest auto market after the United States. In the first nine months of this year, there were 4.58 million vehicles sold there, a 23.84% increase from a year ago. GM, working in conjunction with Shanghai Automotive Industry Corp. and Liuzhou Wuling Motors Ltd., expects to sell more than 1 million vehicles in China for the first time this year. That would be a 20% jump from the 830,000 sold in 2006. 

But there’s a problem: A recent report from the State Environmental Protection Administration said vehicle emissions accounted for 79% of the contamination in China’s most polluted cities.

China is home to 16 of the 20 most-polluted cities in the world. So the fact that it recently overtook the United States as the Number One emitter of greenhouse gases on the planet – a title the U.S. held for more than 100 years – is hardly a surprise.  

With the new R&D facility, Wagoner, the GM CEO, is banking on the hope that the Chinese government, and China’s consumers, will increasingly demand vehicles that are more fuel efficient, and less harmful to the environment.

"We believe China has the potential to become a leader in the adoption of alternative propulsion systems," he told reporters during a visit to Beijing on Monday.

According to Wagoner, what happens in China will have a major impact on the global auto industry’s adoption of environmentally friendly technologies. If China accepts hybrids and other alternative technologies, 50% of auto sales could be environmentally friendly vehicles in five to six years, versus 10% today.

The General Motors Center for Advanced Science and Research would have the explicit mandate of helping China overcome its reliance on fossil fuels. According to the AP, Wagoner said GM picked China for the research center because of the country’s fast-growing vehicle market and the government’s push to develop alternative energy sources.

"We see a lot of [government] interest in working with auto manufacturers to bring those to market as quickly as possible," he said.

A solid foothold in the Chinese market and the blessing of the government in Beijing might be just what General Motors needs to reclaim its position as the world’s Number One automaker, a post that Japan’s Toyota Motors Corp. (TM) has snatched away. 

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India, no doubt, has corned the global market in the service sector. Think of it as the call center to the world. But China has established itself as the world’s factory floor, making everything from Barbie dolls to match sticks.

Yet while the growth in India has been impressive (its economy grew by 9.4% last year), it’s lackluster numbers on the manufacturing side have Indian entrepreneurs and policymaker disappointed and frustrated.

India’s service sector now accounts for more than half of the nation’s GDP. And that’s where its greatest growth has been, rising from 37% in 1990.

The only problem is that manufacturing has hit a wall, growing only by 2% of GDP from 1990 to 2005.  And many Indian entrepreneurs and policymakers fear India is losing out to China in a big way.

In China, manufacturing now accounts for 35% of GDP, according to the Boston Consulting Group. Compare that to 6% in India. Same goes for global trade. China clocks in at 7%. India a meager 1%.

"In our manufacturing potential, we are fast losing the race with China," J.J. Irani the director of Tata Sons said in an interview with BusinessWeek. Tata Sons is the parent company of the Indian conglomerate Tata Group, which is comprised of 98 companies that span across seven business sectors.

"China is more organized and faster than India," Irani went on to say, "The gap is widening."

Easing Up On Government Regulation May Help

Over the past two decades, India has been loosening its former dirigiste model, with strong government influence, in favor of a market-based economy. Direct taxes were reduced, government licensing of industrial activity was dissolved, and large companies were given more avenues for investment.

But some outmoded laws and restrictions still remain in effect, weighing heavily on manufacturing, curtailing Indian exports, and stifling the nation’s economic growth.

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Labor laws are notoriously strict in India, and the manufacturing sector has been bound in a cocoon of red tape. For example, in the manufacturing industry, a company that employs more than 100 people must notify the government of any plans to layoff or fire a single worker. However, that law does not apply to the service sector.

"We are overpoliticized and all of our problems have a political solution," Irani said.  "Economic problems need economic solutions. Religious problems need religious solutions. Social problems need social solutions. But everything here is an industrial solution, a political solution."

The Paris-based Organization for Economic Cooperation and Development agrees. Last week it released a report that stated: "The government’s target of reaching GDP growth of 10% in 2011 is achievable if reforms continue."

The report also concluded that: "In service sectors, where government regulation has been eased significantly or is less burdensome, output has grown rapidly, with exports of information technology-enabled services particularly strong."

The OECD is clear on its position that the country still has to loosen "restrictive" labor laws and the "inefficient" regulation of product markets if it wants to reach its goal. Additionally, policymakers must simplify the tax codes and encourage privatization.

Building From the Ground Up

Another key focus for India to gain competitiveness is infrastructure.

Expensive and unreliable electricity make blackouts all too common. Insufficient roadwork has left streets riddled with potholes and jammed with traffic.  Rolling blackouts force some factories to maintain costly back up generators.

India’s transport network is so inefficient it’s estimated that up to 40% of the country’s farm produce ends up rotting in fields or spoiling en route to customers. The price of food staples rises as a result, and that drives inflation.

BusinessWeek pointed out that the India of today bears a striking resemblance to the China of a decade ago.  Ten years ago China’s economy was getting ready to takeoff, but the infrastructure wasn’t there. So Beijing launched a massive modernization initiative, building 25,000 miles of expressway.  But India still has just 3,700 miles. That’s because only 4% of India’s GDP gets reinvested into infrastructure development. In China that number is more than double that, closer to 9%. 

Plans for improvement are ambitious, and India is taking the matter seriously. But putting the plans into action will be costly and time consuming.  New airports are currently under construction in Bangalore and Hyderabad. Nearly 3,750 miles of highways were built between 1999 and 2005 at a cost of about $7 billion.

And a little more than $12 billion went into the Golden Quadrilateral highway, which links India’s four biggest cities of Delhi, Mumbai, Chennai and Kolkata.

But right now, only 760 of the planned 4,500 miles of highway running north to south, and east to west, across the country, have been actually been completed. 

The heavy price tag that has come with progress has forced India to operate with a very high margin of debt. They country’s debt equates to 75% of its GDP (down from 82% in 2004), one of the worst ratios in the world. So, what’s an emerging country to do?

The Struggle to Attract Foreign Investment

If India wants to keep moving forward, it’s going to have to count on some big time contributions.  The Indian government estimates (or at least hopes) that public and private organizations will contribute between $330 billion and $500 billion to the nation’s development over the next five years.

That may very well be the case, but India is also going to need some help from abroad.  Inflows of foreign direct investment increased to 2% of India’s GDP from less than 0.1% in 1990. And the country only attracted $8 billion in foreign direct investment last year. China attracted $63 billion. 

Last year, Intel (NASDAQ:INTC) passed over India and chose Vietnam as the site of a new chip assembly plant. Intel made no secret of the fact that it looked to India as a home for the project first, and the snub baffled the country’s business community. Intel never offered a public explanation. Industry insiders have said it was the lack of reliable water and electricity that turned off the software giant.

The estimated cost of that plant was $605 million, and now Intel is ready to spend $1 billion on a semiconductor test and assembly plant in Vietnam.  This is just a fraction of the foreign investment that has retreated to other Asian interests in light of India’s shortcomings. 

Still, with many improvements underway and others on the docket, India isn’t out of the race.  Ford, Hyundai and Suzuki all export a significant number of cars from India. LG, Motorola, and Nokia all turn to India for to produce hardware for their respective phone services. And Honeywell, Siemens, and Schneider have all built factories for a variety of electronic products. Also, India has close to 60 manufacturing plants that adhere to the requirements of the U.S. Food and Drug Administration, the largest number outside of the United States.

Investing in India

India is losing the race with China but it has made a very strong impression in the service sector. If government reforms, infrastructure development, and foreign investment continue to increase then it may be able to make up some ground, but it’s going to be a tough road ahead literally and figuratively.

There aren’t many places to look if you’re interested in getting in on India’s developmental push.  A good place to start however would be Sterlite Industries India Ltd. (SLT). The company’s primary business is the production of copper in India. Sterlite’s copper cathodes and cast copper rods can be put to use in housing wires, electrical cables, and telecom cables. The company also mines bauxite and zinc ore, and produces aluminum conductors and other aluminum products.

A more diverse play might be the India Fund Inc. (IFN). The India Fund is a non-diversified, closed-end management investment company that invests in Indian equity securities.  At least 80% of the Fund’s total assets are invested in equity securities of Indian companies. Its portfolio includes common stocks, warrants and short-term investments.

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• Organization for Economic Cooperation and Development:
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• BusinessWeek:
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China Mobile Ltd.’s (NYSE:CHL) 30% nine-month profit growth is just as impressive as it is worrying – to Warren Buffett at least.

The world’s largest mobile-phone operator credited rapid subscriber growth and gains in value-added businesses for its growth, which has handed investors 120% gains on the company’s stock since year to date.

To be clear, Buffet didn’t cite China Mobile specifically when he warned investors to be "cautious" about investing in China, whose benchmark index has more than doubled this year. But its rapid growth was one of the many triggers of the famed billionaire’s investment alarms.

"We never buy stocks when we see prices soaring," Bloomberg reported Buffett telling reporters yesterday in Dalian, northeastern China, home to a subsidiary of Berkshire Hathaway Inc. "We buy stocks because we’re confident of the company’s growth. People should be cautious when they see prices rising."

Buffett made headlines throughout the year by paring down his stake in PetroChina Co. Ltd. (NYSE:PTR), now the second-largest company in the world, thanks to a 76% year-to-date growth in its stock.

Right now, you can make a case for buying or selling China Mobile. On the plus side, its business is solid, and telecommunication customers are continuing to opt for cell phones over conventional landlines. For proof, note the poor nine-month 1.8% profit growth of China Telecom Corp. Ltd. (NYSE:CHA).

On the down side, like many Chinese heavyweights, China Mobile is trading at its peak. But many investors don’t care about that as much as they care about what Buffett says. And since Buffett said to "be cautious," people will, and that’ll help squeeze some of the air in China’s bubble.

But as Money Morning reported in August, China Mobile has a possible Achilles Heel that could upend its massive growth. Only a small percentage of China Mobile’s tens of millions of new users this year are contract customers. The large majority are pre-paid users, meaning they haven’t committed to China Mobile as their long-term provider.

In contrast, American telecommunication companies lock customers in with term contracts that offer discounted prices. The point of the contracts isn’t just to guarantee regular cash inflows, but also to make sure competitors don’t get a cent of its customers’ money. 

China Mobile may be far ahead of its competition, but it’s also giving them the opportunity to cherry pick its customers. Add a possible correction to the mix, and long-term China Mobile investors could see the stock’s value ski down the mountain it quickly climbed this year.

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Bear Stearns Cos. Inc. (BSC) and Asia’s largest securities firm, China Citic Securities Co., agreed to invest $1 billion in each other.

The deal secures broad access to China investment-banking business for Bear Stearns, who lags in China investments compared to its rival Wall Street securities firms. Its third-quarter profit plummeted 61%, and its stock has fallen 28% year-to-date.

"We are confident that combining our operations in Asia with Citic Securities will greatly benefit Bear Stearns’ global client base and generate substantial new revenue and growth opportunities for the firm," Bear Stearns Chairman and Chief Executive James Cayne said in a company statement.

Government-controlled China Citic will buy 40-year convertible trust preferred securities in Bear Stearns. In return, Bear Stearns will buy six-year convertible debt and five-year options in China Citic. They also plan a joint venture in Hong Kong.

China Citic will buy the equivalent of 6% of New York-based Bear Stearns’ shares and collaborate to sell financial products and services in China, the companies said in a statement yesterday. China Citic could boost its stake of Bear Stearns up to 9.9%.

Bear Stearns’ shares buzzed a few weeks ago when Citic’s announced its interest in investing in Bear Stearns. At the time, Bear Stearns’ was a true value play after its shares had been beaten down by the worldwide credit crunch. China Citic wasn’t the only interested company, as Bear Stearns was talking with Wachovia Corp. (WB), Bank of America Corp. (BAC), China Construction Bank Corp., and Warren Buffet via Berkshire Hathaway Inc. (BRK.A, BRK.B), according to other published reports.

In September, billionaire Joseph Lewis struck a deal when he offered $860.4 million for a 7% stake in Bear Stearns.

If approved by China and U.S. regulators, this will mark the second mainland China purchase in a U.S. bank. The first occurred two weeks ago when China Minsheng Banking Corp. Ltd. acquired a 9.9% stake in San Francisco’s UCBH Holdings Inc. (UCBH).

Both purchases underscore efforts of China banks to expand worldwide. In August, Industrial & Commercial Bank of China Ltd., China’s No. 1 bank by assets, acquired a 79.93% stake in Seng Heng Bank Ltd., which is the third-largest lender in Macau. Last year, China Construction Bank Corp., paid $1.2 billion for Bank of America Corp.’s (BAC) 17 branches in Macau and Hong Kong.

And analysts are forecasting more Chinese banks expanding internationally.

"What you are seeing here is the growth of globalization," Eugene Fram, the J. Warren McClure Marketing Research Professor at the Rochester Institute of Technology College of Business, told Money Morning during an interview about the Minsheng purchase. "It also demonstrates the increasing affluence of China and of Chinese companies, which are now reaching out to extend their global position beyond their own country. This is an embryonic deal – embryonic in that it marks the birth, or beginning, of something very new."

News and Related Story Links:

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China had a 6.2% inflation rate for September, and can expect inflation to continue at that high rate for “a few months,” – despite renewed efforts to hold down the general level of prices – the National Development and Reform Commission, China’s top agency for economic planning, has reported.

The Bank of China has already raised its benchmark interest rate five times this year and instructed lenders to set aside larger reserves eight times. Still, an inflation rate of 6.2% isn’t much of a decrease from the 10-year high of 6.5% posted in August. Additional, and possibly larger, interest-rate increases will be required to soak up the rising tide of excess liquidity that’s washing through the economy, right now.

 “We don’t rule out steeper or more frequent moves if necessary,” central bank Chief Zhou Xiaochuan said last week. So far, attempts to rein in China’s blistering economy “haven’t been very effective,” he added.  

There are a number of factors contributing to China’s rising inflation. A ballooning trade surplus, skyrocketing pork prices, and oil prices in excess of $90 a barrel are all infusing the Chinese economy with excess liquidity.

Pork prices have nearly doubled since the start of the year, fueled by a shortage of pigs and by high feed costs. Pork prices have declined a bit recently, dropping 11% in August after government aid was provided. Beijing supplied $1.9 billion (14.6 billion yuan) in relief to farmers. 

The price of oil, which briefly shot above $90 a barrel last week, is also problematic for the Chinese economy.

Accoding to Zhou, “the high oil price has resulted in a surge of cash at oil-producing countries, and as a result, this large amount of funds is flowing around the world looking for investment opportunities. China’s excess liquidity is partly linked to a surge of cash in the world, which is partly contributed by oil producing countries.”

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The driving force behind inflation in China, however, is the nation’s burgeoning trade surplus. China’s weak currency has helped usher exports out of the country, resulting in a record $185 billion trade surplus in the first nine months of the year. That’s already more than the $177.5 billion surplus for all of 2006.

China’s central bank says it expects inflation to exceed the government’s 3% target. The inflation rate for the first nine months of the year was 4.1%, a 0.8% drop from the same period last year. 

“To lower prices will be an important task for our economic regulation,” said Zhu Zhixin vice chairman of the National Development and Reform Commission. “These measures may include exercising a monetary policy of moderate austerity, restricting excessively fast investment in fixed assets and to take measures to adjust prices.”

So far, China has resisted pressure to let its currency appreciate in value, instead favoring exports and economic growth as a priority. But the inflation situation is becoming more severe and token rate hikes of a fraction of a percent aren’t doing enough to keep the economy in check. The NDRC’s report may serve as a wake-up call to Beijing’s policy makers.

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Many investors have been shell-shocked over the last few days as they watched the dollar continue its slide, the stock markets perpetuate their recent gyrations, and crude oil punch through the $90 a barrel level. And now industry experts are now saying the U.S. housing market won’t turn around until 2009 or 2010.

Investors who see this as a time to "lay low" obviously haven’t been reading Money Morning.

That’s unfortunate, since those investors are missing out on the profitable suggestions we’ve offered in recent months that are already paying off nicely. What’s more, most of these strategies also help investors better manage (reduce) risk.

But since I truly can’t stand "I told you so’s," let’s not go there.

Let’s instead concentrate on what you still can do right now to achieve bigger returns in the days, weeks and months ahead, even if the U.S. markets go to heck in the proverbial hand basket.

Here are three steps you can take right now to help your financial future stay on track – even if the U.S. markets melt down:

• First, go global or go home. I coined this phrase several years ago and it’s a not-so-subtle jab at the fact that the world’s financial markets are decoupling from the United States for the first time in history. The global financial markets are increasingly consumer driven – but by consumers from outside the United States. This is a dramatic departure from the days in which world’s markets lived or died by the spending of U.S. consumer. But no longer. In the years ahead, the world will increasingly revolve around consumers from China, Eastern Europe and even the Middle East. This will create a bold new world when it comes to profit potential, particularly when you consider just how much weaker the dollar could get even from the historically low levels that it’s trading at right now.

• Second, keep an eye out for income. As U.S. markets soften and the dollar continues to weaken (and it will), income investments will play an increasingly important role in the building of your wealth. Wall Street would have you believe that this is a new idea. It’s not. In fact, it’s one of the "oldest new ideas" I’ve ever seen. Studies show that up to 97% of total stock market returns since 1871 come from reinvested dividends. Historically, income investing meant utilities and muni bonds only. What a yawner. Now it can also mean higher-yielding investments from abroad.

• Third, befriend the global trends. It’s not enough just to go global or to keep an eye on income. You’ve got to combine those two strategies and then also align your money with the powerful global trends of our time. We’ve been following those trends for months here at Money Morning. Three of my favorites are energy, tangible natural resources and defense/aerospace. By befriending these powerful global trends, you dramatically increase your odds for success.

Now all we have to do is to put these three strategies to work in the most opportunistic way possible. Here are some specific investment choices in the categories I’ve just mentioned:

• To capitalize on world’s biggest brands and launch your own personal bull market, consider the SPDR Global Titans exchange traded fund (ETF) (DGT) or the SPDR Dividend Aristocrats ETF (SDY). Not only will you capture and capitalize on the world’s biggest brands here, but you’ll also have the stability of companies that are truly global in scale. Note that SDY is more selective because of its income focus and the fact that it includes the bluest of the blue chips that have raised dividends for most every one of the past 25 years.

• When it comes to China, I think you’ll hard-pressed to find anything better or simpler than the iShares FTSE/Xinhua China 25 Index ETF (FXI) which replicates the FTSE/Xinhua Index or the China Regional Opportunity Fund (USCOX) from U.S. Global Investors Inc. (GROW), which casts a broader net outside China to include the economies of neighboring countries doing extensive business with China. A great strategy. [For our report on just how to play the FXI ETF, which is trading at a near-record level, please click here. The report is free of charge].

• If currencies are your thing, you could invest in the DB G10 Currency Harvest Fund (DBV), which exploits trends between the world’s Top 10 currency trading pairs.

• And, when it comes to energy, I still particularly like the Canadian Royalty Trusts, as I have for years. Not only will you benefit from rising energy prices, but the best trusts like the Enerplus Resources Fund (ERF) and Canetic Resources Trust (CNE) have proven, deep reserves and are likely acquisition candidates for cash rich buyers as the Abu Dhabi / Penn West takeover recently proved. Plus, the hefty dividends you bank in the meantime won’t hurt either, because a falling dollar only makes them more valuable.

The bottom line is this: The markets are soft, U.S. Federal Reserve Chairman Ben S. Bernanke is talking out of both sides of his mouth, and Wall Street is seemingly bent beyond repair from the subprime mortgage mess. But your investment returns don’t have to be a mess, too.

So go global and go home – wealthy.

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• Money Morning Investment Report:
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• MarketWatch.com:
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• Money Morning Interview:
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  Here’s Why MGM is a High-Profit Play on China.

Officials at solar-cell-maker LDK Solar Co. Ltd. (LDK) were apparently confused about the quality of the silicon in the firm’s inventory- just as an ex-finance official has alleged- according to an audio recording of an internal conference call obtained by The Wall Street Journal, the newspaper reported yesterday.

LDK, based in southern China’s Jiangxi province, makes the silicon solar wafers used to convert sunlight into electricity. But it depends on a mix of both new and recycled batch silicon, and that requires the company to be very specific about the source and the age of the silicon that’s in its inventory.

However, in e-mailed messages to regulators and to KPMG, Charley Situ, LDK’s former financial controller, has accused the solar-cell maker of reporting inflated figures for its silicon feedstock, The Journal reported. Specifically, Situ alleges there is a discrepancy between LDK’s reported inventory and the amount of "usable" silicon that’s actually available.

And The Journal says the recording of the Sept. 13 conference call that it obtained seems to support the contention of Situ, the ex-LDK official. In the recording, Situ and two other LDK officials- Yao Qiqiang, the vice president of accounting, and Liu Yizheng, an accounting manager- openly discussed the quality of the "feedstock" silicon with Jack Lai, LDK’s finance chief.

On the call, Situ estimates that two-thirds of the feedstock in question is older than 180 days, making it unsuitable for use producing the solar-panel wafers- something LDK should reflect by taking a write-down that will appear on its financial statements, affecting its financial position, the newspaper reported.

After finance chief Lai ask why that feedstock isn’t usable, account manager Liu explained that the inventory is leftover bits of the silicon that had already undergone testing by the production team. According to The Journal, Lai then said that "I think you should do some careful data analysis" to determine the quality of the inventory.

Yao said that "what the accounting department needs to do is a categorization of the inventory in terms of life and ways in which it was purchased…and hand it over to the technology team for a review. Let them decide whether it is usable or not," stated the newspaper report.
LDK says that Situ’s allegations are without merit, and described him as a disgruntled ex-employee who was fired. He says he resigned, the newspaper reported.

In its initial public offering on June 1, LDK raised nearly $500 million. By Sept. 26, the shares hit their all-time high of $73.95, leaving the company with a market value of $1.3 billion- nearly a three-fold increase. It paved the way for a handful of other China-based solar-power firms to go public, as well. [To read Money Morning's full report on all the China-based solar-energy firms that have gone public in the past year, please click here. The report is free of charge.]

LDK’s shares plunged $3.24 each, or 7.24%, to close at $41.51 yesterday (Thursday). Some U.S. shareholders are traveling to China to visit the company’s headquarters to assess LDK’s prospects, the newspaper reported.

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• The Wall Street Journal:
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It’s not particularly unusual to see a $10 stock move up 9.43% in a day. But it’s extraordinary to see a $200 stock make that kind of move.

It’s even more amazing to see something like this happen on a day when the Dow Jones Industrial Average swung by a staggering 237 points from high to low, while the broader Standard & Poor’s 500 Index moved 25 handles from peak to valley and back again.

And yet that’s just what the benchmark exchange-traded fund (ETF) for China did yesterday (Wednesday).

The iShares FTSE/Xinhua China 25 Index ETF (FXI) soared $18.76 a share, or 9.43%, to close at $217.80 yesterday. The ETF – viewed as a benchmark for China’s stock market – also hit a 52-week high of $218.48.

No matter how you slice it, this was an extraordinary move and is one that dramatically highlights China’s potential as well as the considerations facing U.S. investors who refuse to "go global."

We say this because:

• You can’t afford to avoid China: The FXI ETF is up 95% year to date.
• And you can’t afford to rely solely on the U.S. market: The closely watched S&P 500 Index is only up 9% year to date.

Just think about that: The U.S. market has underperformed this broad-based China ETF by 86%.

Since the end of September alone, FXI has soared from $180 per share to yesterday’s close of $217.80 – a gain of 21% in less than three weeks.

Is it too late to "go global" – or more specifically – to play China?

Not at all.

But be very careful about chasing FXI at these levels. It’s risen a very long way in a very short time and may be over-extended. Big surges like the one we experienced yesterday – which cap an already-protracted run – is a potential indication that a profit-taking sell-off is only days away.

For investors who don’t yet have an investment in China, the FXI ETF remains a great play to make. But risk-management is key. So if you want to make this investment, but you’re concerned about a possible correction, as we are, buy in with new money, but in equal increments over the next few months to keep your risk down.

And if you already have FXI in your portfolio, consider using trailing stops to protect your profits. [To read a detailed interview with Asia expert Keith Fitz-Gerald on China and its potential - including some stocks to consider - please click here].

In the meantime, the surge that sent the FXI ETF to a new high yesterday carried over and sent Asian markets higher today (Thursday). Asian markets continued to soar today, with Hong Kong’s benchmark Hang Seng index even crossing the threshold of 30,000 for the first time ever in intraday trading.

China-related stocks such as Bank of Communications and Aluminum Corp. of China, or CHALCO (ACH), helped fuel the surge. Japanese shares also advanced in early trading today. However, stocks on mainland China dropped sharply in trading this morning as investors took profits after a string of record finishes in recent weeks. In early trading on mainland China, the Shanghai Composite Index fell 2.6% to 5,882.55.

"The market is really volatile," Conita Hung, head of equity markets at Delta Asia Financial Group in Hong Kong, told MarketWatch.com. "The Hang Seng index is up mainly because investors expect [Hong Kong-listed] shares to close the [valuations] gap with [Shanghai-listed shares], but some are cautious because of fears China may announce further tightening measures."

In an investment-research report released today, Morgan Stanley (MS) Research analysts downgraded their rating on Hong Kong markets to "cautious sell," in view of stock valuations that have "become untenable," the analysts reported.

"We see a 30% probability of a correction to 24,000 [representing a potential decline of 20%] in the coming three months, which would take us down to fair value … from there we could resume the bullish trend," the Morgan Stanley research report stated.

News and Related Story Links:

• MarketWatch.com:
  Hang Seng Sets Record, Leads Broad Asian Rally.

• Money Morning Interview:
  China: Bubble or Bull Market?

• Money Morning News:
  Minsheng Becomes First Mainland China Bank to Invest in a U.S. Bank.

• Money Morning Investment Analysis:
  Here’s Why MGM is a High-Profit Play on China.

With stock prices in China continuing to soar, I decided to sit down this week with our resident Asia expert, Keith Fitz-Gerald, to talk about the promises and perils of the China market.

Given some of the landmark calls Keith has made – the historic rise in crude oil prices and the credit crisis that roiled the world financial markets – his thoughts on Asia and mainland China are exclusive for Money Morning readers.

Here are some of the highlights of our interview:

WP: Let’s talk China. There’s been an unprecedented increase in stock prices. As a well-known contrarian investor, that kind of price action always leaves me worried. And, yet, I’m also a big believer in China. What’s the real story here? Is it a bubble or a bull market?

KF: That’s an excellent question… There’s no doubt we’re in the late stages of a historic bull market, but we’re still early when it comes to calling it a bubble.

WP: That’s an interesting way of qualifying what we’re seeing. Could you be more specific?

KF: You know as well as anyone that a bubble usually manifests itself through obscene, and unsustainable, valuations. Now, there’s no question that the valuations on Chinese stocks are very high right now – in fact, they’re among the highest in the world – but everything is relative: They’re not yet obscene when compared to the growth that’s taking place there. For instance, we’re seeing annualized EPS [earnings per share] growth of 70% or better in mainland China, and yet P/E ratios are still being compressed. That suggests that prices still have some additional upside before catching up.

Having said that, valuations will become obscene in advance of a meaningful correction, so that’s obviously something to watch out for.

WP: So we could actually still see some additional upside from here?

KF: Yes. Based on how speculative "bubbles" form, and factoring in the remaining pent-up demand from Chinese investors who really want to be part of what’s happening in their own country right now, another 30% to 50% to the upside wouldn’t be out of the question in my mind. I also like the fact that so many people are becoming pessimistic in the face of rising prices and increasing economic strength. As you know, that so-called  "Wall of Worry" is actually very bullish from an investing standpoint. Of course, it won’t be a straight ride up, and it’s important that investors understand that.

WP: Talk to me about that for a minute. You’re very well-known for having called the China market corrections of last year, and advised your subscribers a mere four days before the China stock market dropped 9% overnight. Do you see a similar correction in the near future?

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KF: From a technical perspective, China corrects or recoils about every seven to nine months, which puts us on course for a pullback in November, if present patterns hold.

But, realistically, a pullback could come at any time. That’s why I think investors should carefully protect their holdings using trailing stops – especially in cases where they’re sitting on large profits. More-experienced investors could achieve the same objective by using options.

WP: For investors who haven’t yet made a move on China, is it too late to do so, now?

KF: Absolutely not. In some respects, the rocket-like trajectory we’ve seen in the past 12 months is exactly what’s going to lure more folks to the party. What’s more, what we’re seeing in China now is really the first stage of a global ‘decoupling’ from the U.S. economy that will continue for the next several decades. As part of that decoupling process, investors who get into the game early – and by early, I mean now – will realize some truly garish profits before this is done.

WP: By ‘decoupling,’ you’re referring to the process where one economic superpower essentially leapfrogs another?

KF: That’s essentially it. The U.S. market won’t be essential to the growth of the world economy as it is now. If it slumps, it won’t necessarily take the global economy down with it.

WP: Having the advantage of knowing your investment strategies quite well, I know that you always balance risk and return … so many investors – even pros that I’ve written about or interviewed through the years, focus so much on returns (profits), that they forget about risk. But you never lose sight of that.

So what do you recommend?

KF: Three things.

• First, this late in the game you want to be thinking about companies that will profit "because of" China, as opposed to just searching for stocks of companies that are ‘in" China. The easy money has already been made. In other words, you want to put new money to work where it’s most certain to play out "because of" China’s growth, rather than focusing blindly on companies that will profit because they are "in" the Chinese market. This helps keep the upside wide open, but as you’ve noted plays the crucial role of limiting downside risk – which is something 99% of investors are forgetting in their rush to "get rich" from China.
  
• Second, consider indirect exposure through global companies doing business with raw materials, energy, shipping and mainline consumer brands that are really in their infancy in China.

• Third, wherever possible, make you’re your money is in line with long-term fundamentals trends cater to Chinese consumers’ needs. As you know, Bill, from the time you spent as a business journalist reporting from Shanghai and Beijing, some of this can actually be accomplished by investing in U.S. companies such as Yum! Brands Inc. (YUM), PepsiCo Inc. (PEP), McDonald’s Corp. (MCD), and MGM Mirage (MGM). We’ve written about many of these companies right here in stories in Money Morning. Others will require investments in well-researched China-based firms like those I write about in The New China Trader, which is our VIP trading service. The bottom line, though, is that it will take the wallets and rising standard of living of China’s consumers that will make all of this happen.

WP: As always, Keith, you’ve provided some very interesting and intriguing insights. And, as you note, we’ll continue writing about these opportunities here in Money Morning and in The New China Trader.

KF: My pleasure!

Contributing Editor Keith Fitz-Gerald, a brand-new addition to The Money Morning team, is one of the world’s foremost experts on the Asian markets, especially China and Japan. A professional trader who works with qualified investors and institutions, Fitz-Gerald likes to do “boots-on-the-ground” research. In doing so, he’s established a deep intelligence network throughout Asia. He and his family split their time between Oregon, Austria and Japan. He writes regularly for Money Morning, our daily global news service. He’s also the new editor of The New China Trader, one of our VIP Trading Services. To subscribe to Money Morning, our popular and fast-growing free global investing news service, please click here. If you sign up for Money Morning, you will receive our free 6,000-word research report, ‘The Three Best Investments in Asia Today.’

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