With China’s GDP growth rate reaching over 8% over the past 5 years, China still may be in it for another year. China looks good for the long run, but their short run bubble may be a risky investment. With the Olympics coming and FDI in 2007 reaching 67.3 billion dollars, the highest in the world, China may have risk of a slow down. Problems include their 1.5 trillion USD forex reserve and their appreciating currency which are at the forefront of news.

Expectations have been rising faster then China knows how to deal with. While 5 years ago China and other emerging markets were performing at roughly the same level as US markets, in 2007 MSCI emerging market index beat the S&P 500 by over 20%. Everyone wants to get a piece of China, but policy changes may have an effect on this double digit growth. One of these big policy changes is updating their currency policy. Right now while it is slowing fluctuating to a fixed basket of currencies, in 2008 it will be allowed a wider margin to fluctuate. Their growing forex reserve of USD will also start to affect their currency.

In the near term the Olympics sound like the best thing that China can do, but looking at it from the other side it can also be bad. With China having the Olympics they have not allowed their economy to lose any steam in growing. This growth is unprecedented and most likely cannot keep going up after the Olympics. Even though China has recognized that too fast of growth can be a bad thing, I personally do not think enough will be done before the Olympics to slow growth. With interest rates already above 7% and a slowly appreciating currency, for either of these values to move sharply in their respective directions, China’s bubble may burst. With the U.S. lowering their interest rates because of domestic problems that will only increase Chinese inflation.