With 2007 drawing to a close and the New Year almost upon us, it is a good time to step back and review events in China over the past year.

All things considered, 2007 was a good year for China. Defying the law of large numbers, the country’s GDP, which is already the fourth-largest in the world and is fast closing in on Germany at number three, continued its strong growth and will have expanded by 11.6 percent when all is said and done, This marks the fifth year in a row in which China’s economy has grown by at least 10 percent.

Along with the strong growth of its overall economy, key industries in China continued to move into positions of global prominence during the past year. China’s auto industry, for example, produced more than 8.5 million trucks, buses and passenger cars in 2007, making the country the world’s third largest auto industry behind the United States and Japan, and the world’s second largest market for passenger cars, second only to the United States. Moreover, vehicles made in China are now showing up all over the world. In this past year, China exported over 500,000 vehicles, more than its entire industry produced when I first came to the country in the early 1990’s.

One of the goals of then Premier Zhu Rongji in the mid 1990s was to create “national champions” in key industries in China which would rank among the leading companies in the world. In 2007, China took a giant step towards accomplishing that goal, at least in terms of stock market value. Of the 25 most highly valued companies in the world, eight are from China. PetroChina is the most highly valued oil company; China Mobile the most valuable telecommunications franchise; Industrial Bank of China the most valuable bank; China Life the world’s most valuable insurer; and China Shenhua the most valuable utility in the world.

And finally, China made headlines in 2007 as it began to diversify the investment of its massive foreign currency reserves. Searching for higher returns and strategic relationships, China’s sovereign fund invested $3.0 billion to take a 10 percent position in Blackstone when the world’s largest private equity shop went public in mid year. As the year closed, and losses from the sub-prime mortgage crisis in the United States mounted, China invested another $5.0 billion to take a near 10 percent position in Morgan Stanley, the venerable U.S. investment banking firm.

The year also held some negatives for China, however. The “Made in China” crisis gave the country’s manufacturing sector a black eye, as continued pricing pressure by purchasing managers, increased competition among a growing number of Chinese companies anxious to join the export game; and rising raw material prices lead to manufacturing shortcuts and material substitution. Newspaper stories describing accidents caused by defective tires imported from China; lead paint in toys and massive product recalls by Mattel, the world’s largest toy maker, threatened to destroy the China brand that the country has been trying so hard to establish.

The Danone/Wahaha dispute which erupted during the year reminded everyone that, despite the significant improvement in China’s investment environment, old fashioned arguments between foreign and Chinese partners still happen in China, even with the largest, most visible and most successful joint ventures. As the China market continues to gain in importance, and the ambitions of Chinese companies increasingly become global, the interests of Chinese and foreign companies will continue to collide. In that sense, Danone/Wahaha may mark the end of the “joint venture” era in China.

After nearly ten years of being in remission, inflation reared its ugly head in China in 2007. The annual inflation rate began the year by immediately jumping to 2.2 percent in January, and then continued to increase month by month, reaching 6.5 percent in October. Inflation is particularly worrisome because its impact is the greatest on those who can least afford it.  One of the major questions to be answered in 2008 will be: “Where will it stop?”

Finally, I consider China’s stock market performance in 2007 to be in the “mixed” category. Investors were ecstatic when the stock markets in both Shanghai and Shenzhen more than doubled in value in the first ten months of the year, but the $1 trillion valuation placed on PetroChina, twice that accorded by the international markets, was a poignant reminder of just how over-valued China’s stock markets are. In late October, the government began to talk the market down, and the subsequent 20 percent decline in stock market values took some air out of the speculative bubble. But, with a non-convertible currency, continued inflows of foreign currency, and few places for Chinese investors to invest their cash, China’s stock markets remain a giant pressure cooker and a reminder of just how far China has to go to create viable capital markets.

I can still remember being in the Hard Rock Café with my wife, daughter and hundreds of other anxious Beijingers when the Olympic Committee announced that Beijing had been selected to host the 2008 Olympic Games. For almost eight years now, China has been preparing for this historic event, and everyone has assumed that the coming year will be the best in the country’s history. A great deal of careful preparation has been made, and in many respects, 2007 laid a good foundation for what should be an exciting year. Nonetheless, China enters the New Year like it has every year since I have been here with some serious unanswered questions which need to be addressed. The only difference is that in 2008, the whole world will be watching.