China's national economic plans have been reduced to a shambles, which is great news for investors in energy, materials and capital equipment.

At least for a while. I'd say we have 12 to 18 months of relatively clear sailing before the bills come due, as they always do.

My advice: Rejoice for a moment and then add to share positions in companies likely to benefit from the shambles. In this column, I'll give you 10 stocks that fit that profile. And watch like a hawk in 2008 for signs either that the Chinese economy is reaching a boiling point or that the Chinese government is ready to get serious about turning down the flame under the pot.

Brakes Don't Work

China's government wanted to slow the economy's growth a bit from the 10.7% rate turned in for 2006. A rate near 8% would be ideal, Beijing's planners said at the beginning of 2007, because that is high enough to generate the jobs the country needs to stay even with its population growth and low enough to keep the economy from further overheating.

Instead, what the country got was 11.1% growth in the first quarter, the National Bureau of Statistics announced April 19. And now the Chinese Academy of Social Sciences is predicting 10.9% growth for all of 2007.

So you can put away your worries about the global economy until 2008, I'd say. China's economy -- no matter what the planners in Beijing might want -- just won't let the global economy slow down.

And the problem -- for Beijing's economic planners anyway -- gets even worse when you dig down into the first-quarter numbers. The Beijing government not only wanted to slow the rate of economic growth from 2006's 10.7%, it wanted to shift the source of that growth away from the export-oriented industrial sector and toward the domestically oriented service sector.

That effort, so far, is failing dismally. Growth in factory output climbed 18.3% in the first quarter of 2007, even faster than growth in the economy as a whole. Those industries -- petrochemicals, coke-making, fuel processing and refining, and metal production and processing -- that consume the most energy grew at a 21% annual rate. And it looks like the steady decline in the service sector's share of the national economy -- to 39.5% in 2006 from 40.7% in 2004 -- will continue in 2007.

Commodities Won't Cool

So instead of seeing a slowing in production from export industries that consume a lot of imported oil, iron ore, copper and other raw materials, production from those industries actually went up in the first quarter and looks likely to grow at the same rate or slightly higher for all of 2007.

And companies -- along with overseas investors -- are putting more money into the kind of hard industrial and infrastructure investments that soak up even more of the global supply of these commodities. Urban fixed-asset investments -- things like roads, apartments and factories -- climbed 25% in the first quarter of 2007 from the first quarter of 2006. Investment in some commodity-consuming sectors is growing even faster: Investment in the cement and aluminum sectors climbed by 39.4% and 49.3%, respectively, in the first quarter of 2007 from the same quarter in 2006.

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) 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) 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) produces just about every commodity, from metallurgical coal to copper, that China needs from nearby Australia.
  • Companhia Vale do Rio Doce (RIO) 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), 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), 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), 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) is a maker of railroad equipment -- from brakes to electronic control systems to locomotives -- that sells to exporters such as General Electric (GE) 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.

Speculation is easier to spot. Property values in cities such as Shanghai have soared, leading to massive overbuilding as investors rush in to get a piece of the boom. The Shanghai stock market is up 41% this year and 274% from its 2005 low, but money is still pouring in.

Tellingly, most of the cash now is coming from individual investors who know only that people can get rich on stocks. Individual investors have opened 14,000 new trading accounts this year. The average Class A share in Shanghai now trades at 35 times projected 2007 earnings.

Speculation in real estate and Chinese stocks has the same source as the continued boom in industrial expansion: Money is too cheap and too easy to borrow. Tentative attempts by the Beijing government to temper speculation by raising interest rates and increasing the amount banks need to keep on reserve -- three times so far in 2007 -- have been ineffectual to date, to put it mildly. Chinese banks extended 1.4 trillion yuan in fresh loans in the first quarter of 2007; that's half the total lent in all of 2006.

Food Prices on the Rise

Officially, inflation in China is running at a very modest 3.3% annual rate. But that's still the fastest rate of increase in prices in two years. And higher inflation is starting to show up in food prices, a very worrying development for a government that is all too aware of the huge and growing gap between the haves and the have-nots in China's economy.

In the short run, though, the government may actually be in favor of higher food prices, since that's one way to raise rural incomes. Not much else is working in the government's efforts to close the gap between the industrialized and export-linked coastal regions and the relatively impoverished interior. In fact, despite government plans to close that gap, in the first quarter it actually got worse. Major coastal areas such as Shanghai and Guangdong grew at 12.6% and 13%, respectively, in the first quarter of 2007, faster than the national economy as a whole.

The central government in Beijing doesn't have much control over pollution, and the same goes for the economy. This former command economy doesn't take commands from the center very seriously at the moment.

The Coming Games

Add an increasing sense that the center has lost control to the difficulty of dealing with problems of this magnitude -- runaway growth, rampant speculation, out-of-control lending and increasing regional inequality -- and you have a recipe for explosive confrontation. The Communist Party's hold on power is just shaky enough that national party leaders are loath to share power with anyone, even their own local counterparts.

The confrontation this time is likely to take the form of higher interest rates, a crackdown on lending, drastic efforts to shrink liquidity and political repression of local economic cadres. It won't be as dramatic as tanks rolling through Tiananmen Square in 1989, but the effects in the economic realm could be just as catastrophic.

The Communist Party is in the midst of an awkward leadership transition, which makes any bold moves unlikely soon. And no one in the Beijing government wants to jeopardize the 2008 Summer Olympic Games in the capital or tarnish their propaganda value. So efforts to control the economy before then are likely to speak loudly and carry a very, very small stick.

But after that? The economic gloves come off.
At the time of publication, Jubak owned shares in Anglo American, BHP Billiton, Companhia Vale do Rio Doce and Zinifex. He does not own short positions in any stock mentioned in this column.

Jim Jubak is senior markets editor for MSN Money. He is a former senior financial editor at Worth magazine and editor of Venture magazine. Jubak was a Bagehot Business Journalism Fellow at Columbia University and has written two books: "The Worth Guide to Electronic Investing" and "In the Image of the Brain: Breaking the Barrier Between the Human Mind and Intelligent Machines." As an investor, he says he believes the conventional wisdom is always wrong -- but that he will nonetheless go with the herd if he believes there's a profit to be made. He lives in New York. While Jubak cannot provide personalized investment advice or recommendations, he appreciates your feedback; click here to send him an email.