Yet leave it to the business guys to be unimpressed. Which is

I don’t know anyone who doesn’t like the Olympics. And how can you not? Drama, inspiration, a celebration of the human spirit – “ all in a matter of weeks. And this year, of course, it’s all about China. Was anyone not impressed – “ or awed – “ by the opening ceremonies? If you’re pro-Asian in any way, you had to celebrate the awakening of the “sleeping giant”, as Napoleon called China.

Yet leave it to the business guys to be unimpressed. Which is not really a fair statement, because I’m sure business people around the world are cheering for China’s coming out party. It’s the economy, and the market that is in question.

To be sure, there is no lack of China bulls. One of the most outspoken is renowned investor Jim Rogers, who co-founded the Quantum Fund with George Soros. In December, he published his latest book, “A Bull in China: How to Invest Profitably in the World’s Greatest Market.” Rogers is such a fan of China that in the same month, he also sold his Manhattan townhouse for $16 million (well, it was probably a good time to sell anyway) and moved his entire family to Singapore so that he could be closer to the action. But we’re not done yet. His daughter, now about five years old, is learning mandarin. Jim Rogers has been quoted saying, “… for me it was obvious: the most sensible skill that I can give to somebody born in 2003 is a perfect command of Mandarin.”

“China is on its way to becoming the superpower of the 21st century, and will play the same role that Britain and US did in the 19th and 20th centuries,” says Rogers. In his book, Rogers points out the following:

• The Chinese economy has averaged 9% growth since the 1980s
• 40% of China’s production goes to exports, so it doesn’t have the foreign debt problem that the US does
• The average savings rate in China exceeds 35%, compared to 2% in the US
• China has more than $1 trillion in foreign currency reserves, a figure that is increasing each year with more than $60 billion a year in foreign direct investment and an annual trade surplus (as of August 2008, reserves were estimated at $1.8 trillion)

Rogers estimates that “if projections hold, China will surpass the United States as the world’s largest economy in as little as 20 years… the time to act is now.”

As in all things, timing can be critical. And right now, the market seems to be worried about China. Economic growth is slowing, from a torrid pace of 11.4% in 2007 to an estimated 8.7% this year, and a projected 8% in 2009, according to Lehman China economist Mingchun Sun. Export growth, which had reached 26% in the first half of 2007, slowed to 21% in the first half of 2008, and is projected to slow to 10-15% in the second half of 2008. Inflation is officially 7%, but the real rate is probably higher than that. Real investment is declining, and controls on bank lending designed to stifle inflation will tighten funds available for corporate China. All these concerns have been reflected in the market, as the Shanghai Composite Index has fallen more than 60%, from a high of 6,092.06 in October 2007, to 2,470 today (chart courtesy of Bloomberg.com).

And so the question is, what now? Rogers took this opportunity to buy Chinese stocks. He actually welcomed the drop in Chinese stocks because he felt that the Chinese market had become overvalued. Back in April, he said, “I have bought in the last four to five weeks. I’ve been buying shares in China for the first time in a long time.”

Does that mean you should buy too? Personally, I would be cautious and wait. While I agree that China has great growth potential, there are still a lot of issues out there when it comes to China investing.

I’ve never been a fan of the “decoupling” theory – “ meaning, that China’s growth will continue regardless of conditions in the West. So I guess you can call me a “non-decoupler”, or to make things simple, a “coupler”. Fact is, China’s economy is still
largely export-driven, and its biggest markets are still the United States and Europe. And the problems in the West are far from over. If anything, there are still more to come, as the credit crisis expands to problems in credit cards, auto loans and commercial mortgages. Even with oil prices receding and a relief rally in the works, the big problems ailing the US and European economies still have a lot to work through.

That’s the fundamental side of things. Let’s not forget to consider how markets work. Remember that it doesn’t take much to make investors run away. Growth rates don’t have to be negative to keep investors away. If the rate of growth has slowed, that’s enough to make investors, and especially the fast money, look for greener pastures. And that’s exactly what’s happening with the China money.

Finally, keep in mind that professional investors have several advantages compared to you and me. First, they can invest for longer periods of time, and are willing to buy and watch a stock drop further before recovering. If you look carefully at Buffett’s investments, you’ll find that many fall below his initial acquisition price, and that it could be years before he sees a significant return on his investment. In the meantime, he’s still making money hand over fist because he’s diversified, and even if some investments aren’t working, he’s got lot of others that are. Most retail investors, like you and me, aren’t in a position to invest the same way.

Professional investors also have a lot more information at their hands, and can spend a lot more time getting more information. I haven’t invested in China, and one of the major reasons is that I don’t have access to great information on Chinese stocks. I don’t pay for expensive news sources, and in fact, everything I have access to, you do as well (okay, it’s basically the internet). So I prefer US stocks because news is readily accessible.

One way to overcome this handicap is to focus on US stocks with exposure to China. Take Yum Brands, for example. It owns both Kentucky Fried Chicken and Pizza Hut. In the United States and Germany, the company is barely growing, and its margins in this market are weak. In China, KFC is growing more than 25% a year. Its more than 2,000 outlets are a fraction of the company’s worldwide footprint, but accounts for 20% of the company’s total profits. Needless to say, Yum Brands without China not be a happy company.

There are many companies with exposure to China – “ P&G, Nike, Nokia, Caterpillar, Otis Elevators. To determine whether you should invest, you’d have to look at each one individually. Still, there are a couple of important themes to take into account.

Currently, oil is dropping and the dollar is rising. That means commodities prices will fall, and many companies that have been hurt by high commodity prices – “ such as P&G – “ will benefit. These companies have raised prices to compensate for higher input costs, but will not lower prices as these costs decrease. Expect them to benefit significantly – “ both in terms of margins (profits) and with multiple expansion. Still, it’s not all perfect. As the dollar rises, this will make exports more expensive and will decrease the value of overseas earnings. Expect this effect to be accelerated when the Fed increases interest rates sometime over the next year to deal with inflation.

In sum, the road is not all clear for China. After the Olympics, China will return to business. But the rest of the world, which I believe is a large portion of China’s market, will be in the repair shop for some time. China will still have growth that exceeds anything you see in the West.

Many would argue then, as Rogers does, that its time to buy. Still, I can’t tell you when the bottom is, nor how long it will be before the market trends upwards. If you have a very long time horizon, then China is very investible, there is no question. In the medium to short-term, it’s far less clear. So invest according to your appetite.

Until the next time, sleep well.

Ming Lo is an actor, director and investor. He has an A.B. from Harvard College, Cum Laude, and an MBA and an MA Political Science from Stanford University. Prior to going into entertainment, Ming worked at Goldman, Sachs & Co. in New York and at McKinsey & Co. in Los Angeles.

All material presented herein is believed to be accurate but we cannot attest to its accuracy. The writings above represent the opinions of the author, and all readers are urged to check with their investment counselors before making any investment decisions. Opinions expressed may change without prior notice. The author may or may not have investments in the stocks or sectors mentioned.