In an interview with Alex Dumortier of The Motley Fool in 2008, I was asked which industries I thought had good future prospects in China. I mentioned several growth areas, but Alex focused on my third suggestion: “any technology that has anything to do with the environment.”

With China having now surpassed the United States as the world’s largest energy user, Alex remembered my comment, and in his article last week, recommended six Chinese companies: JA Solar; Suntech Power (NYSE: STP); Yingli Green Energy (NYSE: YGE); Trina Solar; LDK Solar (NYSE: LDK); and Solarfun Power (Nasdaq: SOLF). His reasoning was simple, “China’s growing appetite for energy in a world of finite traditional energy sources also creates an enormous opportunity for alternative energy solutions.”

China’s continued economic growth is one reason why it is now a larger energy consumer than the United States. Another, though, is the fact that the country has a long way to go in terms of energy efficiency. Fatih Birol, Chief Economist at the International Energy Agency, said last week: “In 2000, the U.S. consumed twice as much energy as China, now China consumes more than the U.S.” He went on to note that the U.S. had improved its energy efficiency by 2.5 percent annually during that time, while China managed only a 1.7 percent annual improvement. Energy inefficiency is the reason it takes more energy to power a Chinese economy that is only one-third the size of the United States.

Greater energy efficiency comes from more highly developed technology and better energy management and conservation practices. U.S. companies that have this know-how have large opportunities in China, as we are finding with BPL Global, a Pittsburgh-based “smart grid” company that we are helping to expand in the country. A smart grid is an intelligent electricity network that integrates the activities of all of the connected users and generators to deliver sustainable, economic and secure power supplies. China’s rapidly growing energy usage makes getting access to this type of know-how critical to the country’s sustained development.

The China market is indeed big, as demonstrated by the recent figures, but it is also a difficult one to crack. In my years in China, I have learned that there are only two rules. Rule Number One is “Everything is possible,” but Rule Number Two is “Nothing is easy.” It’s certainly possible to build a large clean energy business in China, but don’t expect it to be easy.

How to penetrate the huge China market was the subject of my presentation at the recent Smart Grid Conference in Shanghai. Because the China electricity market is dominated by a few, very large state-run organizations such as the State Grid and the South Grid, different approaches may need to be taken than in other industries. Nonetheless, if a company’s technology and know-how is truly world class, it will find a receptive market in China, and ways can be found to penetrate the market.

For China, becoming more energy efficient is not a matter of political correctness, it is a matter of economic life and death. China needs to continue to grow so that more Chinese can benefit from economic reform. Despite the substantial progress that has been made since 1978, hundreds of millions of Chinese still have not had the opportunity to participate in a meaningful way in this progress. China’s emergence as the world’s largest energy consumer underscores the fact that there are now real limits to how fast its economy can grow if energy efficiency can’t be improved. If the country cannot find solutions quickly, there is a danger that an unacceptably large number of Chinese will continue to be left behind.

Anyone who has spent time in China knows that Tsinghua University is one of the, if not the leading university in the country. Many of China’s top leaders are graduates of the school which will celebrate its 100th anniversary next year.

I was very honored when Tsinghua asked me to address the 2010 graduates of the Tsinghua International MBA Program at their Graduation Commencement last Tuesday. One of the most prestigious programs of its type in China, The Tsinghua International MBA Program is a collaboration between the Tsinghua School of Economics and Management (“Tsinghua SEM”) and the MIT Sloan School of Management. Founded in 1984, Tsinghua SEM, was the first economics and management school in China. Professor Zhu Rongji, the Founding Dean, later became the fifth Premier of the People’s Republic of China.

The Class of 2010 had 108 graduates, 43 of whom are international students from 11 different countries. The graduation ceremony was presided over by Professor Qian Yingyi, Dean of Tsinghua SEM, and Professor Wang Jiang of MIT Sloan School of Management.

Following is what I told the graduates:

Dean Qian, Professor Wang Jiang, Parents, Friends, Honored Guests, and Members of the Tsinghua International MBA Program, Class of 2010,

On June 19, the Peoples Bank of China released the yuan’s peg to the U.S. dollar, and announced that it would instead peg the yuan to a basket of currencies. China regards the composition of the currency basket as a state secret, and officials haven’t publicly disclosed what currencies are being used in the basket.

In 2005, when China last released the yuan from its dollar peg, analysts believed that the U.S. dollar, the euro, the Japanese yen, and the South Korean won dominated the basket, but that the basket also included the U.K. pound, the Thai baht and the Russian rouble. Some analysts believe that the currencies of India, Brazil, Indonesia and India have been added this time around, or had their weightings increased from levels in 2005, reflecting China’s rising trade with these nations.

Among other recent changes is a likely increase in the weighting assigned to the Australian dollar due to its position as a key supplier of industrial commodities to China.

While many are focusing on the effect of China’s new currency policy on the yuan’s relationship to the U.S. dollar, it is likely to have a far more widespread impact. Essentially, China’s new policy means that it will be shifting its portfolio of currency reserves to include more assets denominated by currencies other than the US dollar. The impact of this portfolio balancing will not only alter the value of the yuan against the dollar, but it will also likely change the value of the dollar against the other major currencies of the world.

Since June 19, the yuan has appreciated by 0.7 percent to 6.78 yuan to the US dollar. At the same time, other major basket currencies have also appreciated against the dollar. For example, the euro has now bounced back from its low of 1.19 earlier in the year and now stands at 1.2963. Since June 19, the euro has appreciated by 4.7 percent against the greenback. Similarly, the U.K. pound has appreciated by 3 percent, and the Japanese yen by approximately 4 percent, against the dollar since China went to the basket.

The United States Dollar Index (“USDX”) is a broader measure of the value of the U.S. dollar that compares it to a basket of currencies that includes the euro, yen, pound, Canadian dollar, Swiss franc and the Swedish krona. The USDX started in March 1973 with a value of 100.000. It has since traded as high as the mid-160s and as low as 70.698 on March 16, 2008, the lowest since its inception in 1973.

On June 19, the USDX was 87.0385. Since then it has declined by over 5 percent, signaling a broad decline in the value of the US dollar.

Based on the experience to date, the net effect of China’s new currency policy will be to not only weaken the U.S. dollar against the yuan, but to also cause it to lose value against the other major currencies of the world. In the short term, this may help U.S. exports become more competitive in world markets, but over the longer term, it is likely to lead to higher interest rates and higher inflation for U.S. consumers.

AgBank’s $19.3 billion IPO may or may not go down as the largest initial public offering in history. That distinction currently belongs to Industrial and Commercial Bank of China (ICBC), which raised $21.9 billion in its 2006 market debut.

Largest IPO on record or not, the AgBank offering stirred up quite a bit of interest around the world. Its sheer size and the continuing interest in all things China guaranteed widespread news coverage.

Pamela Ritchie and Martin Baccardax, hosts of Canada’s BNN “After Hours” business broadcast, wanted to discuss the offering, as well as a number of topics regarding China, and I obliged in a 15-minute live interview from Beijing. Apart from the fact that the interview was conducted at 5:30 on Saturday morning, a five-second delay as the satellite signal was bounced from Beijing to London and then on to Toronto made it particularly challenging.

Whether AgBank breaks that record will depend upon whether underwriters decide to exercise the over-allotment, or “green shoe” option as we used to call it on Wall Street. The green shoe option, which is one of the terms agreed upon between the company and its underwriters before an offering, requires the company to issue more shares if the underwriters decide that these additional shares are needed to manage investor demand. The term comes from the Green Shoe Manufacturing Co., the maker of Wellington boots that was founded in 1919 and is now known as Stride Rite Corp., which was the first company to permit underwriters to use this practice.

In order to ensure a strong market reception for an IPO, underwriters typically oversell a new issue of common stock, deliberately creating more demand among investors for the securities than there is supply. That is why a company’s newly issued shares often go to 50, 60 or 70 percent premiums when they begin trading. Investors who could not get enough shares from the underwriters bid the price up when they try to meet their needs through open market purchases. If demand is sufficiently strong, the underwriters typically have the option, for a certain period of time, to require the company to issue up to 15 percent more shares than provided for by the offering at the IPO price. Underwriters like to exercise the green shoe option if at all possible because it means more fees.

If the underwriters exercise the green shoe option in the case of AgBank, the additional $3.0 billion or so of proceeds would enable AgBank to top ICBC’s record capital raise. If not, Agbank will have to settle for second place.

AgBank could not have picked a worse time to come to market. The China market is down 25 percent this year; the China economy is slowing; there are troubles in Europe and the economic recovery in the United States appears to be losing steam. On Friday, when AgBank’s shares began trading in Hong Kong, the Dow Jones plummeted by 261 points. Against this backdrop of negative market sentiment, AgBank’s shares only rose to modest premiums of 1 to 2 percent when they began trading in Shanghai and Hong Kong late last week. Given this weak demand, it is increasingly unlikely that the underwriters will get to earn those additional fees.

There are many reasons not to buy the newly-issued shares of the Agricultural Bank of China: China’s economy is slowing; the country’s property market remains in bubble territory; China’s stock market, one of the worst performing in 2010, is down 25 percent this year; AgBank’s vast network of 24,000 branches staffed by 440,000 employees is inefficient; and the fact that past credit decisions by the bank have resulted in staggering losses are but a few of the major ones.

On the other hand, I can think of at least one trillion reasons to buy the stock — $1 trillion is the approximate amount of money that AgBank’s 320 million customers throughout China have deposited with the bank. A bank’s ability to gather deposits is always considered to be a key determinant of its value, particularly in a country where regulated interest rates provide banks with a cheap source of funding. In this category, there are few banks in AgBank’s league.

In China, the maximum rate of interest that a bank can pay on deposits is regulated, similar to the way interest rates were regulated in the United States until the early 1980s. (Remember the coffee pot your mother got when she made a large enough deposit? By law, the bank couldn’t pay her more interest, but it could give her an appliance!) For a demand deposit, the interest rate that banks may pay is currently capped at 0.36 percent in China. Depending upon maturity, banks may pay progressively higher interest rates, but the maximum rate is 3.6 percent for a 60-month time deposit.

At the same time that it fixes a bank’s cost of deposit, though, China also places a floor on the interest rate that banks may charge borrowers, effectively guaranteeing a “spread” between what banks have to pay for funds and what they can earn making loans. At today’s minimum loan rate of 5.31 percent, the spread ranges from 2.41 percent to nearly 5 percent. Quite literally, being in the banking business in China today is like having a license to print money. With 320 million customers and 24,000 offices across the country, AgBank has the infrastructure in place to keep growing its deposits, and therefore its income stream.

For foreign investors, this virtually guaranteed income stream becomes an interesting currency play. As the yuan rises in value, so does the underlying value of the income stream made possible by AgBank’s $1 trillion of low-cost deposits.

Despite criticism by many that China is not moving fast enough to re-value its currency, there is little doubt that the renminbi will appreciate against the dollar in the months and years ahead. From July 2005 when China released the yuan from its peg to the US dollar, to July, 2008 when the dollar peg was re-instituted in response to the global economic crisis, the yuan appreciated by approximately 21 percent against the dollar. If the yuan is undervalued by as much as 25 to 40 percent as many believe, AgBank’s income stream is almost guaranteed to be worth considerably more in dollar terms in the coming years.

Moreover, investors who buy AG Bank shares are buying shares at a discount compared to those of other Chinese banks. AG Bank’s Shanghai price represents 1.55 times book value as estimated by the IPO underwriters. That compares with 1.82 times for Industrial & Commercial Bank, 1.77 times for China Construction Bank, and 1.51 times for Bank of China. In Hong Kong, AG Bank’s offer price represents a 17 percent discount to the average among the three rivals.

What if AgBank’s loan officers take those deposits and make a bunch of bad loans? Many analysts consider AgBank to be the worst managed of China’s big four banks, so this is a very real concern. Even in this event, investors have downside protection. Heads may roll if bad loans are made, but the government is too concerned with the hundreds of millions of ordinary Chinese citizens who have deposited their hard earned savings in the country’s banking system to let any of the country’s major banks fail. That is the reason why, as recently as 2008, the government paid full value for 816 billion yuan ($117 billion) of bad loans on AgBank’s books, about a quarter of the bank’s total.

Despite the negative economic news that has derailed many IPO’s recently, AgBank’s huge deposit gathering infrastructure makes the bank a big beneficiary of regulated interest rates and future appreciation of the yuan. Buying AgBank’s shares gives foreign investors a way to benefit from both, which is one of the reasons, I suspect, that the bank has been able to pull off such a large IPO in these uncertain times.

If you’re like me, you couldn’t help but get caught up, at least a little, in the LeBron James spectacle over the weekend. As they anxiously waited for LeBron’s decision, sports fans around the world were asking the same questions. Would the 25-year-old “King James” stay with the Cleveland Cavaliers, where he has labored for the last seven years, leading the Cavs to consecutive playoff appearances from 2006 through 2010, but failing to bring home a championship? Or, would he jump to Chicago, New York or Miami in search of greener pastures and championship rings?

On the Saturday afternoon edition of the Larry King show broadcast in Beijing, Larry covered the decision with a number of guest commentators, including LeBron’s high school coach, several retired pro basketball players and Stephen A. Smith, a brash journalist who sometimes ruffles feathers in sports circles because he’s not afraid to speak his mind. The show looked interesting, so I settled in to watch, not expecting to hear anything whatsoever to do with China. I soon learned that LeBron’s decision was all about China — and its huge market.

As the commentators bantered back and forth, they all seemed quite knowledgeable and made good points, but they differed on their predictions as to where LeBron would ultimately decide to go. James played high school basketball in Ohio, so his high school coach made the sentimental case for Cleveland. Others made cases for both Chicago and New York, and Larry King made a big deal out of the fact that Mayor Bloomberg had urged LeBron to settle in New York, while President Obama was pressing the case for Chicago.

As someone who lived in NewYork for close to 20 years and who loves the Big Apple, I found myself agreeing with the commentator who argued that LeBron should choose New York and the Knicks. “Follow the money,” was his rationale. “If LeBron wants to be a billionaire, New York, the largest media market in the United States, is where he wants to be,” he said. “There’s nothing quite like standing on Madison Avenue, and the best way to build your global brand is to put on a New York uniform.” I found myself nodding in agreement.

At that moment, though, Stephen Smith interjected and emphatically, categorically and unequivocally said that King James was going to the Miami Heat to join Chris Bosh and Dwayne Wade, two other NBA superstars. In fact, Smith had been saying all along that LeBron would join the Miami Heat for three reasons. First, it’s all about winning championships, and Smith made a strong case that the Miami Heat would be virtually unbeatable with James in the lineup. Secondly, he said that it didn’t matter anymore what city a star plays for, it’s now about China, and he made an oblique reference to LeBron’s contract with Nike. And finally, he pointed out that there are no state and city income taxes in Florida.

Smith sounded convincing, and I was intrigued by his reference to China. For the rest of the program, I strained to hear more comments about LeBron and China, but no one picked up on it. While I thought I knew what Smith was saying, I wasn’t sure, so I did a bit of research.

The article, Nike Looks To China To Make LeBron A Billion Dollar Athlete, cleared it all up. It quoted Magic Johnson as saying the same thing as the guest commentator on Larry King. “If LeBron James wants to be a billionaire, or close to it, [he's] gotta go to New York.” 

But, Nike thinks differently. As CNBC’s Darren Rovell explained in the article: “It’s clearly not about U.S. market size anymore when you talk about endorsements. Based on the numbers, China, whose 300 million basketball fans almost total the population of the United States, is the most logical place to look. “

Terry Rhodes, owner of a marketing firm in Shanghai, then made the connection that Smith had made in predicting that LeBron would go to Miami. According to Rhodes, the Chinese are attracted only to champions—hence his suggestion:“For LeBron and Team LeBron, the ultimate objective has to be get those rings onto LeBron’s fingers, and then, the rest of the opportunities in China really can become available.”

The article went on with supporting data.

“Ever wonder why Kobe Bryant’s jersey keeps outselling LeBron’s year after year despite LeBron’s meteoric rise in popularity in the United States? According to Rovell, Kobe’s popularity is “at least two times bigger” than LeBron in China, a fact that has caused Kobe’s jersey to continue to be the number one selling jersey in China (LeBron is number 2.)”

ESPN reporter Mark Schwartz summed it all up nicely: “If James decides that being in New York is not his best opportunity to be a champion, don’t expect him to succumb to the seductive appeal of Madison Avenue.”

When NBA free agents like LeBron James make choices based on how those decisions will play in China, you know that the vast Chinese consumer economy is not far behind. LeBron is a young man who has had only a little exposure to China, but he gets it.

In April, the American Chamber of Commerce in China, which represents 1,200 U.S. companies, issued a report saying that China is increasingly using discriminatory rules to reduce access to previously open areas of its economy and to promote its own technology industries. The report highlighted complaints about efforts to nurture China’s computer and other technology companies — a policy dubbed “indigenous innovation” — by favoring them in government procurement and other areas. “These policies appear to be diminishing the ability of foreign companies to access the Chinese domestic market,” John D. Watkins, Chairman of the American Chamber said.

Fair enough. That’s what the American Chamber of Commerce should be doing — using its influence to keep a level playing field for U.S. companies in China. But, how about when it goes in the other direction?

In view of the American Chamber report, I found it quite ironic to read that The Congressional Steel Caucus, a bipartisan group of 50 U.S. lawmakers, is urging Treasury Secretary Timothy Geithner and the Committee on Foreign Investment in the United States to review plans by Anshan Iron and Steel Group, China’s fourth largest steelmaker, to invest in a $175 million steel plant in Mississippi. In a letter to Secretary Geithner, the lawmakers said they are “deeply concerned” that direct foreign investment in a U.S. steel company will threaten U.S. jobs and national security. Anshan reportedly wants to buy a 20 percent stake in the project for $7 million.

If you’re like me, you’re no doubt wondering how a Chinese company taking a minority ownership position in a Mississippi steel plant can threaten jobs and America’s national security. I could understand the objection if the plant is making some type of exotic new steel that is used in defense applications. But, the steel plant in question makes reinforcing bar, or rebar as it is known in the trade. These are the rather ordinary steel bars that are used to reinforce concrete and masonry structures in construction projects. I can’t even begin to imagine how it can be argued that investing money in the American economy can threaten jobs.

Stories like this remind me just how far apart the United States and China are in terms of really understanding one another.

In September 2008, with oil selling at nearly $150 per barrel and gasoline prices at an all time high, we went back to our farm in Lambertville, New Jersey to enjoy the final days of summer. Before even saying hello, one of the local merchants, an early forties, salt-of-the-earth type who knows that I do business in China, stopped me dead in my tracks with this question, “What are the Chinese doing buying all of our oil?”

At first, I didn’t know whether to take him seriously or not, but I finally concluded that he meant what he said. Implicit in his question is the presumption that the United States is somehow entitled to all of the world’s oil, and that the Chinese were to blame for the run up in prices. Given that attitudes like this are deeply ingrained in some ordinary Americans, we have to rely upon business and government leaders to lead the way and promote a spirit of trust and cooperation between the world’s two leading superpowers. Unfortunately, the complaint raised by the Congressional Steel Caucus against Anshan Steel’s investment in Mississippi demonstrates that our U.S. leaders don’t get it either. Until they do, it will be very difficult for the United States to have a constructive dialogue and healthy relationship with China.

After dropping precipitously from over $1.50 at the beginning of 2010 to a four-year low of $1.19 on June 7, the Euro has been recovering ever since. On Friday, the Euro closed at $1.26, up sharply in the week’s last three days of trading.

Not wanting to suffer the same plight as Greece, Germany, the United Kingdom and other European countries have recently announced various austerity measures, and are making strong commitments to reduce their ballooning deficits. This new fiscal conservatism on the part of the European countries is undoubtedly restoring confidence in the Euro amongst currency traders.

But, there may be something else at work as well.

On June 19, The People’s Bank of China (PBOC) announced that it would abandon the peg that has kept the Yuan valued at approximately 6.8 to the United States dollar over the past two years, allowing the Chinese currency to appreciate gradually. Rather than pegging China’s currency to the dollar, the PBOC said that it would instead manage the value of the Yuan in reference to a basket of currencies. Although the exact composition of this basket is considered by China to be a state secret, currency experts believe that it may include anywhere from 15 to 20 different currencies. The Euro, as the world’s other major currency, is undoubtedly a key element.

Therefore, the fact that the sharp increase in the value of the Euro in the final days of trading last week coincided with a similarly sharp increase in the value of the Yuan should come as no surprise. Neither should the sharp rise of the Japanese Yen and the British Pound, other basket currencies, on Thursday and Friday.
As early as the beginning of June when the Euro reached its low point, some market watchers believed that the Chinese had already begun buying the Euro, enabling the currency to stabilize. Last week’s currency movements suggest that China’s new basket is beginning to operate, and that the Euro is likely to be the biggest beneficiary.

As China allows the Yuan to increase in value against the U.S. dollar in the coming months, expect to see corresponding increases in the Euro and other basket currencies. With over $2.5 trillion of currency reserves, roughly the same amount of financial assets held by the U.S. Federal Reserve, China is now playing a lead role in determining the value of not only its own currency, but those of other major countries as well.

In 2010, China’s workers found their voice. Emboldened by the country’s new labor law, encouraged by China’s continued economic progress, and frustrated that they are not sharing enough in the wealth being created, workers have found new ways to demonstrate their dissatisfaction.

Ten workers at Foxconn’s giant factory in Shenzhen expressed their discontent in the most desperate way possible—they committed suicide. In my 15 years in China, I’ve never seen anything like this. Foxconn’s response was to throw money at the problem. The company doubled the wages of its workers.

Other workers simply went on strike. Managers at Honda, Toyota, Carlsberg and a Brother sewing machine plant, among others, have all had to deal with striking workers in recent weeks The result—higher wages, which in the case of Honda, amounted to a double digit increase of 24 percent.

Even without resorting to strikes, workers at Yum! Brands units in China managed to get wage increases. After a six-month negotiation, KFC signed its first collective contract on the Chinese mainland last week with its employees in Shenyang, the capital of Liaoning province. According to the contract, more than 2,000 workers at the 66 KFC and Pizza Hut outlets, under Yum! Brands in Shenyang, will get a minimum monthly wage of 900 yuan ($132), up from 700 yuan ($103) .

Finally, at least nine Chinese provinces and cities will raise minimum wages, beginning July 1, by as much as a third after Premier Wen Jiabao called for measures to head off growing worker unrest. Beijing is increasing the lowest monthly salary employers may pay to 960 yuan ($142), up from 800 yuan ($118). Henan, the nation’s most populous province with almost 100 million residents, is raising its minimum wage by 33 percent to 600 yuan ($88), the local government said on its Web site.

What does all this mean? The editors at the wall Street Journal were wondering the same thing and asked me to write an op-ed on the subject. My editorial, Managing Rising Wages in China, appeared in Monday’s edition of the paper.

We were very pleased to learn from Onlinecollege.org that they had named ManagingtheDragon.com one of the 30 Best Blogs to Follow China Business News.

Here is what they said:

As China continues to emerge as a world power and significant force in key diplomatic issues and especially in influencing the international business community, those in the West need to keep up with all the developments coming from the East. Through blogs like these, you can learn about Chinese business history, the stock market and economy, language and cultural issues, green industry, and other topics that herald the new China. Whether or not you’re earning an online college degree in business, take a look at these blogs that can teach you a lot about the future of our economy, as well as China’s business news.

Managing the Dragon: From the auto industry to technology to globalization and the environment, Managing the Dragon covers “business in China — from the ground up.”

Onlinecollege.org is a one-stop source of information regarding online college programs. The company and its site provide prospective students with information about online college admissions, accreditation, student loans and student aid. The top online colleges are featured on the site which also provides higher education news. Up-to-date and insightful articles enable students to earn a degree and gain a valuable, real-world education at the same time.