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China: To Be Bullish or Not...

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Not only does China dominate Asia in terms of sheer size, but it’s the world’s leading producer of textiles and manufactured goods. Thanks to its 1.3 billion residents, China is also the second largest auto market and consumer of crude oil.

Reflecting this optimism, the iShares FTSE/Xinhau China 25 (NYSE: FXI) is up 38.69 percent through November 1st. The fund, which tracks top companies on the Hong Kong Stock Exchange, has been one of the top performing single-country ETFs so far in 2006.

China is so hot, Goldman Sachs has invested in Gao Hua Securities, and Cisco Systems has invested some $700 million in emerging and upstart Chinese enterprises.

But what about the risks? For all of its potential, China has plenty of problems. For starters, how about a weak banking system, lots of bad loans, governmental corruption and a currency that’s not freely convertible?

And what about China’s striking resemblance to Japan? Back in the 1980s, predictions of Japan’s economic dominance were rampant, but never panned out. Similar claims are being made today about China.

There’s no denying China’s economic potential. But it still has a lot of growing up to do.