The pace of economic development in China is bordering on frenetic, with no signs of a significant cool-down, despite government attempts to apply the brakes and the threat of a slowdown in the U.S. economy.

In the third quarter of 2006, year- over-year growth in China’s real gross domestic product was 10.4%, according to the Hong Kong Monetary Authority, with inflation at a relatively benign 1.4%. While growth may slow slightly from this torrid pace, most observers expect it to run between 9% and 10% for each of the next few years.

“There are always both the short- and long-term perspectives. But anyone who has taken the long-term view in China has done well. And, in the past couple of years, it has been terrific,” says Eric Kirzner, professor of finance at University of Toronto’s Rotman School of Management. “There is no question that in the next 20 to 30 years, the focus of economic power will shift toward Asia — and that China will play a major role in the future of the world.”

Charles Lannon, director of global equities at Toronto-based Toron Investment Management, describes China as “one of the most powerful investment themes of our time.” In terms of historical reference, he says, the rise of China is on par with the multi-decade post-war economic growth in the U.S. But he raises a cautionary note for the shorter term: a key question is the health of the U.S. economy. A weakening U.S. housing market is expected to slow growth in consumer spending, which could put a crimp in the demand for Chinese exports.

Barings Asset Management (Asia) Ltd. calculates that for every 1% drop in the growth of U.S. GDP, there is a corresponding drop in Asian GDP of 0.3%.

However, China is becoming less dependent on the U.S. Trade with other countries is picking up, and domestic demand is increasing as the urban middle class develops and incomes rise among the agricultural population.

Although the U.S. accounts for 21% of China’s exports, Europe is even more important, accounting for 23%. Trade with Japan and South American countries such as Brazil is also growing rapidly, says Adrian Au, portfolio manager at Hamon Investment Group in Hong Kong and manager of Excel China Fund, offered by Toronto-based Excel Funds Management Inc.

“Textiles used to be the biggest component of Chinese exports, but now electronic components have become the most important,” says Au. “In addition, China is moving up the value chain, graduating from simple, low-end goods to higher-end, value-added products.”

Worried about the red-hot pace of growth, the Chinese government has been attempting to rein in excesses in a number of areas without “shooting itself in the foot,” says Hugh Simon, Hamon’s CEO. In 2006, the reserve ratio — the amount banks must put aside in relation to their deposits — was increased three times; the reserve ratio now stands at about 9.5%. The central bank also raised interest rates on deposits and loans twice last year in an effort to tighten liquidity.

K.C. Lee, a Hong Kong-based portfolio manager with Fidelity Investments International and manager of Fidelity AsiaStar Fund, believes growth in China is higher than the official numbers indicate, based on the growth reported by individual provinces as well as on the consumption of raw materials and electricity.

“Structural growth is being reinforced by huge inflows of foreign money, and foreign exchange reserves are growing rapidly, which strengthens the economy and underpins the currency,” says Lee. “Fiscal and monetary policies have been introduced to slow economic growth. But with the amount of money washing into China, they probably won’t have much impact.”

While consumer price inflation has been relatively benign, there has been strong “asset price inflation,” he says, as stock market values and real estate prices have escalated. With poor people generally not participating in these gains, there is potential for the gap between rich and poor to widen. There’s also the risk of hot money flooding into these assets and creating unsustainably high prices.

“Rapidly rising asset values ultimately can lead to overinvestment, careless investment decisions and a greater number of low-quality investments,” says Lee. “It’s a natural response for people to pile in when they see money being made. It’s typical human behaviour, and creates the ups and downs in market cycles.”

@page_break@Infrastructure spending on roads, railways and power utilities continues to be strong in China, with the government making an effort to enhance the rural sector and even out the disparities between the wealthier coastal regions in the east and the poorer rural regions in central and western China. Through various measures, including the mechanization of farming, introduction of fertilizers and irrigation techniques, and enhancing the ability of farmers to own land, the government is working to improve the lives of the 70% of Chinese people who continue to live an agricultural existence.

Money managers focusing on China see opportunities in a variety of areas, including both the domestic and export-oriented sectors. They are investing primarily through companies that trade on the Hong Kong Stock Exchange, as it has fewer restrictions and higher standards than the exchanges based in mainland China.

Money managers who fear the effects of a U.S. slowdown on China’s exports are focusing on China’s voracious consumer demand and investing in a range of domestically oriented industries, ranging from banking services and insurance to retail goods, wine and property.

In the financial services sector, Richard Evans, investment director of Asian equities for Martin & Currie Investment Management Ltd. in Edinburgh, is concerned about loan quality at the banks, but likes insurance, including China Life Insurance Co.

Tim Leung, head of Asian equities for I.G. Investment Man-agement (H.K.) Ltd. , however, sees opportunities in the Chinese banks, several of which have been listed on the Hong Kong exchange over the past year. With a Hong Kong listing, the banks have better access to capital to develop their consumer finance business and housing loans.

Credit cards have huge potential in China, adds Au, with a mere 10 million credit cards estimated to be in the hands of 1.4 billion people.

Another play on domestic demand is China Mobile Com-munications Group, a supplier of cellphones.

Property prices have been rising because of increased demand and abundant financial liquidity, although some money managers say real estate in big cities, such as Shanghai and Beijing, is overvalued. Evans sees better prices in second-tier cities. He is investing in companies that cater to the higher end of the mass market, including Shimao Property and Guangzhou RF Properties.

Chuk Wong, a member of the global equities team at Goodman & Co. Investment Counsel and manager of Dynamic Far East Value, Dynamic Greater China and Dynamic Value Global Class funds, also likes property developers catering to China’s emerging middle class. He holds Greentown China Holdings Ltd. and Shanghai Real Estate Ltd. in his portfolio.

Wong’s top holding is gold miner Zijin Mining Group Co., the world’s lowest-cost gold producer. IE