Back then, I sensed that knowing more about China would upgrade my financial advice and help me manage money better. No, I didn’t recommend Chinese stocks. Quite the opposite: Knowing more about China has helped me stay on course, focused on the fundamentals, and buying shares in our great companies that are doing business in China.

The people of China have suffered so much in the 20th century that they don’t want to go back. Yes, there is resentment about political corruption and jealousy when a neighbor gets a new apartment and you stay in your old rundown shack. But the memories of darker days override the negatives and keep most Chinese on a positive path.

Someday the generation that remembers the past horrors will be gone. Someday things will change in China. But for this generation, the economic miracle called China is unstoppable.

China’s Impact on Oil Markets

China is now the world’s second-largest importer of oil, behind the United States. By 2005, there were 19 million cars in China, up from four million in 2000. Goldman Sachs thinks the number of cars in China will double by 2010 and reach 130 million by 2020. China is using up natural resources at an unsustainable rate. But oil demand is just one part of China’s energy challenge.

About 80% of China’s energy comes from coal. As a result, China has 20 of the world’s 30 most polluted cities. China has the dubious distinction of being the world’s biggest emitter of sulfur dioxide, the cause of acid rain. Japan and Korea complain about the damage to forests and fishing from China’s pollution. Chinese air pollution has reached into Hong Kong. Fortunately China’s leaders understand the challenge from excessive use of natural resources. China has a five-year plan to reduce pollution and make China more energy efficient.

Here is a little-known fact; China is already the world’s largest user of alternative energy sources, including wind power, because China has more incentive than any other nation to seek out, develop, finance and adopt alternative sources of energy. As a result, China could become our energy friend, helping to speed the reduction in dependence on fossil fuel-based energy sources.

China does not deserve all the blame for higher oil prices. Unfortunately, OPEC production cuts and excess speculation in the oil market keep inflating the oil price. I still believe the oil price is ultimately headed lower. Here’s one more clue: Last month, IHS, an oil consulting group, reported that the western desert in Iraq has been “substantially under-explored,” because Iraq had been swimming in oil, and Saddam Hussein’s regime was complacent.

Until recently, we thought that Iraq had 115 billion barrels of oil, the world’s fifth-largest reserve. The IHS report says there is potentially another 100 billion barrels in Iraq’s desert. All major oil firms have expressed interest in drilling and developing in Iraq. How many other regions are underexplored? There may be far more hidden oil than the “peak-oil” theorists now believe.

I am also convinced that China’s leaders fear an upward spike in oil prices far more than we do. A former OPEC oil minister recently said that Saudi Arabia is making a big mistake cutting production to prop up the oil price. He said that keeping the oil price up encourages even more exploration and provides an incentive for oil consumers to be more aggressive in adopting alternatives to OPEC oil.

He is correct. You can see that in China. Beijing has been currying favor in Cambodia, since there is at least one major oil field offshore Cambodia. China has been financing oil exploration around the world and is determined to find new sources of energy to improve life for its 1.3 billion people.

In its latest World Economic Outlook, the economists at the International Monetary Fund say the global economy grew at a 5.4% rate last year and will grow at a 4.9% rate this year and next. Anything above 4% is remarkable and very positive for corporate profits and therefore stocks. The global economy has enjoyed the strongest sustained expansion in more than 30 years, and there are no signs that it is over. Oil prices above $60 have not stopped the global economy. China’s growing need for energy, oil included, does not require a change in our basic strategy. In fact, China’s growth is a major contributor to growing corporate profits and the recent portfolio gains at Investor’s World. (Click here to access the entire portfolio.)

My Recommended China Plays

Bear in mind that we, at Investor’s World, invest BECAUSE of China, but not IN China. My long-standing advice has been to avoid Chinese stocks and instead buy stocks in major companies that profit from doing business with China. Highflying China stocks may make good cocktail party conversation, but life-changing investments come from confidence.

Would you have the confidence to put all your life savings in Chinese stocks? I wouldn’t. Buying a few thousand dollars of a thinly traded Chinese stock may sound like fun, but doubling a few thousand dollars will not lift your personal wealth much. Worse, speculating in Chinese stocks can be a distraction. I feel it is far better to make larger commitments in a solid portfolio of well-established, high-quality stocks.

The following two stocks are at the top of my list:

Citigroup’s (NYSE: C) core strength is consumer banking. When I was with Citibank in the 1970s, our Zurich office was part of their plan to buy and develop consumer banking in Europe. In the decades since then, Citi’s management has developed a global consumer banking footprint. China is one of their biggest consumer banking opportunities ever. According to the People’s Bank of China, the number of credit cards in China increased 22.7% last year to almost 50 million. Even more impressive, there were 1.08 billion debit cards in China at the end of 2006.

Citigroup is active in consumer banking in China through its own branches and in partnership with local banks. Recently, a Citigroup-led consortium gained operating control of a major Chinese bank. Citigroup is a major China play.

Ironically Citigroup’s weakest consumer banking market is the U.S. CEO Chuck Prince has begun to address that by assigning new management to the U.S. consumer bank operations, which will expand operations, probably starting in the Midwest.

Citigroup beat expectations for the first quarter. Excluding severance costs associated with job cuts and other cost cutting, Citigroup earned $1.18 a share in the first quarter, well above the $1.10 Wall Street expected. Current 2007 estimates range from $4.55 to $4.61. At 11.7 times estimates and with a 4% dividend yield, Citigroup is a Buy.

My second top recommendation is an international company that happens to be the dominant cell-phone provider in China, with a market share above 30%. That increased in the first quarter when unit sales in China rose 44%. The company reported a solid opening quarter. Revenues were 9.86 billion euros ($13.4 billion), up 3.7% from a year ago.

Share buybacks helped per-share results, which were 0.25 euros ($0.34), flat with last year. It gained market share in the first quarter. The company is demonstrating its ability to navigate the changes in the dynamic cell-phone market. It is staying profitable even as the bulk of new phone sales are in emerging markets. 2007 earnings are estimated at $1.50. At 17 times earnings, this stock is a definite Buy.

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