Top 10 China Stocks, While They're Hot

Forget about worries that falling demand in China for copper, nickel, iron ore, zinc, tin, coal and oil will put an end to the current global boom in commodities prices anytime soon. Inventories are tight and growing tighter. Demand from China will keep the upward pressure on prices well into 2008, especially because in many of these commodity industries, planned additions to production capacity won't really add much to supply until 2008 or later.

10 Stocks to Ride

If you want decent exposure to sectors that will benefit from higher-than-expected growth in China, I'd think about adding to positions in these five picks:

• A.O. Smith(AOS Quote) has a water-heater business in China that grew by 36% in the first quarter of 2007. The stock is one way to play China's real estate and home construction boom.
• Anglo American(AAUK Quote) has become a play on China's continued demand for coal. The company is expanding a joint venture to build a clean-coal-to-chemicals project and invested in the 2006 IPO of China's largest coal producer.
• BHP Billiton(BHP Quote) produces just about every commodity, from metallurgical coal to copper, that China needs from nearby Australia.
• Companhia Vale do Rio Doce(RIO Quote) has 23% of the Chinese iron ore market.
• Komatsu, the second-largest maker of construction equipment in the world, has aggressively targeted sales to China.

And if you'd like to add to that exposure, here are five more stocks to consider:

• Joy Global(JOYG Quote), one of the three big suppliers of mining equipment to survive the 25-year industry slump, is reaping rewards, now that the mining industry is booming.
• Peabody Energy(BTU Quote), the biggest U.S. coal producer, has been busy acquiring coal assets in Australia to get a leg up on the Chinese market.
• Terex(TEX Quote), a smaller player in the mining and construction segments, will also give your portfolio exposure to new factory construction through its division that sells such things as aerial work platforms. Through acquisitions and joint ventures, Terex has entered the Chinese market for surface-mining trucks and construction cranes.
• Wabtec(WAB Quote) is a maker of railroad equipment -- from brakes to electronic control systems to locomotives -- that sells to exporters such as General Electric(GE Quote) that are supplying the railroad build-out in China and India. About 40% to 50% of the company's sales come from such original-equipment makers.
• Zinifex, an Australian zinc miner and smelter, has acquired two new high-yield zinc ore deposits in Canada and is looking at a global zinc market with a projected supply deficit of 140,000 metric tons in 2007.

There's a catch to all this for investors, of course. There's always a catch. The inability of China's economic planners to get the economy to dance to their tune means that several damaging long-term trends remain in motion. And the longer these trends run, the harder Beijing will have to stomp on the brake to regain control of the economy. The more vigorous efforts required at that point are more likely to overshoot the mark and send the economy spiraling from too much growth into a true stall.

They Can't Keep It Up

Current growth rates in China aren't sustainable. I explained the reasons at more length in my Feb. 7 column, Time Running Out on China's Boom, but let me briefly summarize the biggest problems here. First, no economy can run at 11% a year without building up excesses of speculation and inflation. The evidence says that China is knee-deep in both problems.